A College Students Guide to Building Good Credit

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You’ll learn a lot in your college career. Whether through hands on or lecture; your education will help establish you into the business world. Funny then, at no point in our educational careers is it mandatory (and in most cases, not even an option) to learn about credit. Boiling it down to its most basic form, credit is a score that shows how trustworthy you are with borrowed money. This score becomes necessary to make major purchases in life such as owning a home or buying a car. As a college student seeking a new car I was plunged into the abyss of the credit world with no knowledge of what exactly it was, what factors effected it and what I could do about it. Slowly I began to learn through research and trial and error. Now being in my early 20’s my credit score is excellent and I felt the need to pass the knowledge along to other young aspiring professionals who may only have minor knowledge of the subject.

magnifying class showing credit scores
Credit Scores Range from Excellent to Poor. Photo credit www.cafecredit.com
Credit can be broken down into three groups. Ghost credit, bad credit and good credit. The first, ghost credit is where I started and is more than likely where you are now if you are reading this. Ghost credit is no credit. It tells lenders that they simply do not know if they can trust you or not with borrowed money. There is simply no history to your name in the credit world. They do not know if you can be relied on to make payments on time. Having ghost credit isn’t good, but it is much better than having bad credit. We all started here and you will have to also. Not knowing how to develop credit can be frustrating if you are unaware how it works. You may attempt to go get a simple credit card and find you are denied. Well you are left in limbo because there is no way to establish credit if you are not given the chance to prove yourself. It’s a vicious cycle but thankfully there are solutions.

If possible, have a parent or a good friend cosign for a credit card. A good option for a cosigner is someone with good credit. This tells the lenders that if you turn out to not be reliable they know they can trust the cosigner to cover the tab. Just make sure you pay your payments or the cosigners credit could falter as a result. Another option is to get a prepaid credit card. These types of credit cards are for establishing credit or reestablishing trust if you have bad credit. With a prepaid credit card you hand the bank an allotted amount of money as collateral and that amount becomes your credit limit. That way if you fault on your loans then the bank can use the money you initially gave to pay your balance. Once you have used this card for long enough you can close the account and your money will be returned.

The second type of credit is bad credit. Bad credit shows lenders that you are not responsible with your loans and cannot be trusted to pay them back. This creates a number of issues including higher rates when successfully being granted a loan, denial in loans altogether and a long arduous road to the recovery of your credit. Once credit has been damaged it is extremely difficult and time consuming to repair it. So it’s best to get it right the first time so you don’t have to worry about this.

Last but no least we have good credit. Good credit shows lenders you are responsible with your burrowed money and can be relied on to pay it back. Thus, you will find that interest rates will be lower and the chances of being approved on major purchases much greater. 

So what is it exactly that effects these scores? What can you do to build your credit and keep it there? There are many factors that contribute to your two major credit scores with varying degrees. Knowing these factors will make it a breeze for you to manage you credit score and keep it in the green. These factors are categorized as high impact, medium impact and low impact.

High Impacts:
Payment history may be the most obvious one but it’s a biggie. Its impact on your score is classified as high and for good reason. Looking back on if you have paid your bills on time in the past gives lenders a clear picture of if you will be able to do so in the future.  However this isn’t the only serious factor you need to be mindful of.

Credit card utilization is just as important, if not more so than making on time payments. This factor states how much of your available credit you are using. For example if you have an overall credit limit of $1,000 and at the end of the month you have used $999 of it, that is poor credit card utilization. Doing this will negatively impact your overall credit score. Alternatively if you used only $100 of that one thousand credit limit that will greatly impact your credit score in a positive way. That remaining gap is available credit and the more you have of it the better.
High Impacts are the most important of all credit sections.
A factor you may not have to worry about now, hopefully never, is “derogatory marks”. This may not apply much to you but this category is if you have any bankruptcies or foreclosures. If you were to open a business and declare bankruptcy, then that would be a major mark in this category and detrimental to your current and future credit score.

The age of your credit is important. So start early and open frequently but responsibly.

Medium Impact:
As you can see above, Age of Credit History is where I have a negative mark on my credit. Not much you can do here but start building credit young and start opening accounts frequently. This does not mean to owe money to 10 different open accounts. However, having accounts open shows you get approved often and lenders trust you.

Low Impact:
This brings us to our low impact. Total accounts are a low impact mark and it goes hand and hand with the number of accounts you have open. Having over 10 accounts open is a good thing. So, find some credit cards with no annual fees and store them in a safe. Closing accounts is rarely a good idea, letting the accounts sit is the better option.

Credit Inquiries is the last category we will talk about. This section is broken down into hard pulls and soft pulls. Soft pulls are actions such as signing into a credit checking website and checking your credit. These actions do not affect your credit score and are harmless. Hard pulls as you’ll see which is red for me in particular are events such as applying for a student loan or having a car dealership check your credit. These typically stay on your record for two years.
Total Accounts and Credit Inquiries are low impact and have a minimal effect on your overall credit score.
As you see I have red marks in the medium and low impact sections. Well the age of my total accounts is low as I have just recently started applying for more credit cards in order to help this section as well as the total accounts section. Since the age of your credit history is an average, this section is in the red for me. As well, my total accounts are very low, below 10, which is another negative mark on my credit. My credit inquiries being red is due to the fact that I recently applied for a student loan as well as had my credit checked by multiple car dealers. In another month, these will be off my record and this mark will improve.

These red marks however do not do enough to keep my credit score down. I currently hold a credit score in the green, so control the categories that you can and the red marks that you cannot control will even themselves out over time. The more knowledge you have about credit history and the better you understand how it works and how it can be effected the easier it is to keep your credit good. Keep the score in the green and you’ll never have to worry about fixing it.

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