Establishing Credit

What is a credit score and why does it matter?

A credit score, or a FICO (Fair Isaac Corporation) score, is your financial GPA. It is a single number that condenses your credit history, representing your credit risk. Five components make up your credit score:

• 35% payment history
• 30% amounts owed
• 15% length of credit history
• 10% new credit
• 10% types of credit used

Credit scores range from 350 to 850. Here are how rates are interpreted, according to FICO:

• 720 - 850 = Excellent
• 660 - 719 = Good
• 600 - 659 = Fair
• 350 - 599 = Bad

What is my credit score used for?

1. Build Credit- Your credit score is a number used by banks and other financial institutions when determining if you qualify for an auto or home loan, among other things. But to get a good credit score, you must prove yourself financially. Responsibly using a credit card is one of the main ways to create a credit history and improve or maintain your credit score.
2. Traveling Abroad- Instead of carrying around a wad of Euros or Pesos, you can keep with your card. Just be aware of any exchange fees your provider might charge and if your card is accepted overseas.
3. Consumer/Fraud Protection- Most providers will not hold you responsible if unrecognized charges show up on your card or if it gets stolen. Once you report an incident, the company can no longer hold you liable for subsequent charges.
4. Convenience- Some places don't accept debit cards, and rental car places won't let you leave the lot without seeing your credit card. You might also have times when a bill is due but you don't get paid for another two days, or you might simply be short on cash. While credit cards should not be your emergency fund, they can be a help from time to time.
5. Employment- While current and potential employers cannot access your credit score without warning, they can request, with your official consent, a special credit report from any of the major credit bureaus.  This credit report doesn't contain quite everything a lender can see, but it does contain your credit score and a few other pieces of information that help employers determine if you are a high-risk candidate.

How do I check my credit, and what does it mean?

Credit reports include a good overview of your financial history. There are three credit reporting agencies where you can obtain your credit report—Equifax, Experian and TransUnion. Credit reports can be ordered online by visiting AnnualCreditReport.com, and you can get one free credit report each year from each one of the three credit bureaus. To be most aware of your credit status, you can order a credit report every four months, each time from a different bureau. It is helpful to see how those reports change across the board because each agency’s report is a little different.

However, credit reports do not include your credit score. If you want to know your credit score, you generally must pay for it. myFICO and AnnualCreditReport.com are the go-to places for doing so. Agencies determine your credit score by taking information from your credit report and plugging it into formulas. Credit scores were originally created for lenders, as opposed to consumers, because lenders need to be able to easily evaluate you as a potential loan holder.

Yet, there are a few reasons it would be in your interest to know your credit score. Mainly, you’ll want to review it to see if there are errors; errors can be an indicator of fraud and you’ll want any mistakes sorted out before applying for a loan. While it is more important to receive your credit report than your credit score, but you might check your credit score say once a year, just to measure your performance.

Also, there are also certain circumstances where you may get your score for free. If you are ever denied a loan based on your credit score, the lender is required to tell you your score. And if you apply for a mortgage or if your APR is increased based on your credit score, creditors are required to provide you with your score.

How can I build good credit?

Building good credit requires time, effort and patience. In school, you can’t improve your GPA without taking more classes and working hard at them. That’s how it is with credit scores. As a student, there are a number of things you can do now, and throughout your life, to establish or lift your score:

• Start a habit of obtaining credit reports to evaluate how you are performing financially.
• Make reasonable purchases using your credit card.
• Pay your bills on time. It might be helpful to set up a schedule so you remember when your bills are due.
• Have bills in your name. For example, if you share an apartment, try to have the utility bill in your name.
• Make more than the minimum payment on your monthly credit card bill.
• Don’t co-sign for friends’ credit cards. You don’t want your name tied to someone else’s finances.
• Don’t apply for multiple credit cards at once or have more than you can manage.
• Pay back your student loans on time, in full and ideally in less than the traditional 10 years.