College Credit - Building a Different Type of Credit
Lenders consider credit score and past credit history any time someone applies for a loan or line of credit. Building a good credit history and maintaining a high credit score are essential for anyone who wants to qualify for a car loan, education loan, home mortgage, or other type of credit account. Although college students typically do not have any credit history, they have many opportunities for building good credit. By using credit cards and other lines of credit wisely, college students can develop good financial habits that will help them qualify for larger credit accounts in the future.
How to Build Credit
College students may find it difficult to qualify for large lines of credit due to their lack of credit history. Creditors want to know that borrowers have a history of paying their credit cards or loans on time. Lending to someone with no credit history represents a significant risk, as there is no way to determine if the borrower will maintain his or her account in good standing. This is why college students should start small when applying for credit accounts.
One way to build credit is to become an authorized user on a parent's credit card account. When a college student is an authorized account user, the credit card company reports the account on the student's credit reports. As long as the account remains in good standing, this helps the student build a credit history. If a parent has a history of late payments or exceeding the limit of a credit card account, the student should not become an authorized user. In this case, the parent's poor payment history could have a negative effect on the student's credit.
Secured credit cards are another way for college students to build credit. Traditional credit cards are unsecured, which means that the account holder does not have to put up collateral in order to qualify for the line of credit. Collateral is money or property taken by a creditor in the event that a borrower does not follow the terms of a credit agreement. Secured credit cards require cash deposits before the credit card company will open the account. If someone deposits $500, the credit card limit will be $500.
Before opening a secured credit card account, make sure the company will report to the three major credit bureaus. When a company reports to the credit bureaus, the account appears on the credit reports for these bureaus. College students should also look for secured credit cards that can be converted to traditional credit cards after establishing a history of good payment practices. In some cases, the credit card companies will even double the credit limit when making the conversion. This means that a secured account with a limit of $500 would become an unsecured account with a limit of $1,000.
Taking out a small personal loan can also help college students build positive credit histories. In many cases, a student will need a parent to act as a cosigner for the loan. A cosigner agrees to be responsible for paying the loan balance if the borrower stops making payments. If possible, keep the loan money in an interest-bearing account instead of spending it. This will ensure that money is always available when the monthly loan payment is due. Paying the loan payments on time will help build good credit.
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Factors That Impact One's Credit Score
Payment history is the most important factor in a person's credit score. Paying on time helps build good credit, while late payments or missed payments reduce a credit score. How much money someone owes is also a major factor. When someone has a credit limit of $10,000 and owes $9,700 the high balance indicates that the person may be heading for financial trouble. The length of a person's credit history is also important. This is why college students typically do not start out with high credit scores.
Credit scoring companies also consider the types of credit used when calculating a score. Installment loans, credit cards, and retail credit cards all affect a credit score differently. Finally, scoring companies consider the number of inquiries on a person's credit history when determining a score. Inquiries appear on a credit report when someone applies for a loan, credit card, or other line of credit. Too many inquiries in a short amount of time may indicate that someone is in financial trouble.
How Are Credit Scores Calculated
The credit scoring companies assign different weights to each factor used to determine a person's score. Fair Isaac Corporation, better known as FICO, considers payment history the most important factor. Payment history makes up 35 percent of a person's FICO score. The amount of money owed accounts for 30 percent of the score. Length of credit history accounts for 15 percent of the score. The remaining 20 percent of a person's score is based on the types of credit used and the number of inquiries on the person's credit reports. Each of these factors accounts for 10 percent of the FICO score.
Maintaining Good Credit
Using open credit accounts responsibly is the best way to maintain good credit throughout college. If paying credit card bills and loan payments on time seems difficult, set up automatic payments. If this is not an option, create a calendar that clearly shows the dates payments are due. When mailing payments, send them at least one week before the due dates to ensure they arrive on time. Paying the minimum payment is enough to keep your account in good standing, but this habit allows interest charges to accumulate quickly. Try to pay off small balances in full each month. For larger balances, pay as much money above the minimum payment as possible. College students should also avoid maxing out their credit cards or getting close to the limit on their credit cards. Keeping utilization to below 30 percent of a card's limit will help preserve a student's good credit score.