There are many and more college students who refuse to use a credit card, afraid that it will put them into instant debt. On the other hand there are some that are already ahead of the competition and building up their credit scores.
Need to know terms:
FICO: Fair Isaac Corporation, created what can be argued as the most “popular” credit scoring model
Credit Score:There are many different models of scoring credit however the one we are most concerned about is our FICO score. These scores can range form 300-850, the higher the score the better!
Experian: One of the 3 major credit bureaus we are concerned about
TransUnion: Also one of the 3 major credit bureaus we are concerned about
Equifax: Sounds like a shipping company like the rest but is also one of the 3 major credit bureaus.
AAoA: Average age of accounts
Hard Inquiry: This something that falls on your credit report when someone who is not you checks it (with your permission of course). This will bring your credit score down a couple of a points. These typically show up when you: apply for a credit cards, loans, credit increases and things of that nature.
Soft Inquiry: This is when you look at your own report. Businesses cannot see this but they will see a hard inquiry.
some things to keep in mind with credit:
1) credit is not free money, you must pay it back
2) APR will not matter if you make your payments on time and in FULL
3) the earlier you start building your credit the better
So what is this credit report I keep talking about:
Your credit report is something that contains all the information about your credit history and account information/standing. It will tell a business and you how much credit you have available to use, how long you have had it for (credit history), if you make your payments on time, how much credit you are using (credit utilization) and if anyone is after you to collect a debt as well as any public records such as judgements, liens and bankruptcies to name a few. The 3 major credit bureaus I named earlier, Equifax, TransUnion and Experian compile these reports from the services you use such as a credit card company or bank.
Why should I care?
They are just three digit numbers you say, not scary at all. Wrong! Those three digits are much more important than you might think and can affect your life in a few ways. Lenders use this information to determine how likely you are to repay your loan and if those payments will come on time.
1) No lender will give you a loan if your credit report is nonexistent or says something bad about you.
2) If you manage to get a loan (hard inquiry when they check your report) your interest rates will be very high compared to what you could have had.
3) Your ability to rent and buy a home depends on your credit report. Why should anyone give you a loan when you don’t have a credit report, no credit history to say “Hey, look at me I am responsible”.
4) Your insurance rates will vary with your credit report, the better the report the greater the rates
5) The jobs you can get, some employers do check your credit report as it shows what kind of person you are among other things of course
OK, OK, I give in, how is my score calculated.
Payment history – represents 35% of your credit score
Amounts owed – represents 30% of the score
Length of credit history – 15% of your total
New credit – 10%
Types of credit used – 10% (credit cards, student loans, auto loans, etc)
The exact scoring model is a secret of the company
What is not included in my score? Good question.
1) Any type of credit counseling you may be in
2) Your age
3)any information not on your credit report
4) Any information that provides no value of discerning your credit performance
5) Where you live
6) interest rates on a credit card or loan
7) rental agreements, child and/or family support
8) Salary, title, occupation, employer, or employment history though if you apply for a credit card or loan they may ask you where you work for their purposes not the credit bureaus
9) Race, color, religion, ethnicity, sex and marital status
10) Promotional inquiries from credit card companies, administrative inquiries from lenders to review an account and your own inquiries
Where can I go check this?
If you want it for free you can go to: https://www.annualcreditreport.com and do not worry it is safe, the website was setup by the 3 major bureaus due to law. One catch with that is while you will see the report you will not get to see your score.
If you want to see your score you have to pay for it sadly and it can cost $14.00 – $20.00 + to see it. There is http://www.myfico.com as well as your banks which may offer a paid service and the 3 bureaus themselves.
On the other hand there are free credit report services that use a different unofficial formula to create a score. Now while these scores are not used by any business they provide valuable information on what is bogging your score down and how to fix it up as well as what everything you are doing right now is effecting it. Go check out credit.com or my favorite and definitely the most informative creditkarma.
One of my parents have a credit card, can I use theirs?
Yes. You can be added to someone’s card as an authorized user. This means you will inherit the cards history, credit limit and payments on time as well as some other things. It can be extremely helpful if you are starting out or if they have a long credit history and a very high limit. Only 2 of the major bureaus count authorized users towards your credit score.
Why are all 3 of my scores different?
When you go apply for a credit card, loan or whatever the case may be each lender may not pull your credit report from the same bureau though all three give you a score. This means one bureau you may have 0 hard inquiries while the other may show 99. In this way your scores can vary.
Do my hard inquiries ever go away!?
Yes they will go away in due time. Hard inquiries will fall off 2 years from the date they were requested in cases of credit cards. For account reviews such as a credit limit increase they will go away in one though in all cases the impact of the inquiry lessens after 6 months. They are nothing to be afraid of and the amount of points deducted are typically small.
If you are going to look for a loan there is an exception so you can “shop” for the best interest rates. All inquiries made within 14 days will be counted as one.
I hope this information has been of some use to use. More will come in the future!