By: Kyla Coan
I am sure we are all more than ready for this 3-day weekend to start, I know personally I have a lot to get done, but I also plan to have some fun!
Before I sign off for a couple of days I wanted to talk to you guys about credit, and no I don’t mean credit hours. Today we are going to talk about what credit is, why it matters, and how you can build good credit using credit cards .
When I started college I was 17, but I turned 18 in October, and became financially independent in March of 2014. I was lucky in that I had taken a class my senior year of high school that taught me a little bit about credit cards and what credit was and why it matters. One of the first things I did upon becoming financially independent was find and get a credit card. I went with a Discover IT card, because I love the 5% cash back rewards that change every couple of month, and the 1% cash back on everything else. Plus they offered miss payment forgiveness, and several college students in my extended family had great things to say about them. When I got my card I had a $250 limit. I decided that in order to start building my own credit history I would use my credit card to pay for my Netflix subscription, and pay it off every month. I had heard and seen first-hand how many people let their spending get out of control, so I was extremely cautious with my card for the first year. By the end of that year I had gotten my limit increased to $800, because I was never late with a payment, never carried a balance, and never had more than $15 on the card at any time. By not maxing out your card all the time, staying on time with you payments, and avoiding carrying a balance you can start to build your credit score.
Now, its been 3 years since I got my card, and my credit limit is $2100. I still have never missed a payment, though now I use the card for more things and pay it off still. I use it for my phone bill, for my Netflix, my Chegg, and my Hulu. When Discover offers 5% cash back on gas or groceries or Sam’s Club, I also use my card for that. Now that I know I can be responsible for my card, I will sometimes carry a low balance just to show that I can carry and pay off a balance, which also helps build your score. The biggest mistake I see a lot of students make is they go crazy spending on their first card because its money that you don’t have to immediately have up-front, which is great for big ticket purchases like a piece of furniture, but you have to remember that you still have to pay that money, and if you don’t pay it all when your bill is due, you will have to pay interest, which is extra money on top of the money you still owe. I have heard horror stories of people with $30K in debt or more. Be responsible with your credit cards, because good credit will make your life an an adult much easier when you want a newer car, or to finally buy a house, or rent a nice apartment.
So what is credit? The simplest definition is “the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.” Credit is important when you buy a car, buy a house, rent an apartment, and when you take out any kind of loans, student or otherwise. This is why you want to start building your credit while you are young. I started quickly after I turned 18, and because I have been very responsible with my credit card, I have a credit score of 750. I had a small $5000 car loan, that I paid off within 6 months while I was on my co-op ( I rolled that car the same day I paid it off! 😦 ) and now I have another small car loan that I am close to paying off, and one student loan. I plan to have my car paid off by the end of the summer, and I work hard to try and always at least keep up with the interest payments on my student loan. I even recently got a second credit card for my favorite store to shop at Torrid, because by combining the opening credit card discount with my employee discount I saved about 70% on the clothes that I needed since most of my clothes were years old and falling apart. I used it I think 3 times, and haven’t used it since. I might use it again towards the end of the summer if I decide to treat myself to some new clothes, but even then, I always pay it off.
In the previous paragraph I mentioned that I have a credit score of 750. But what is a credit score and how is it calculated? Basically, a credit score is a quantification of you the borrowers credit files to represent the creditworthiness of you as an individual. This number is used by banks and other lenders to evaluate the risk of lending to you and to mitigate losses. Your credit score is calculated based on the following factors
- Payment History (accounts for 35% of most scores)
- Credit Utilization (accounts for 30% of most scores)
- Length of Credit History (accounts for 15% of most scores)
- Mix of Accounts (accounts for 10% of most scores)
- New Credit Inquiries (accounts for 10% of most scores)
It is important to note though that your credit score may differ slightly between the 3 major credit reporting agencies, but generally they are within about plus/minus 2 points of each other. Here is a chart to show you the credit score ranges!
The 3 major credit reporting agencies are TransUnion, Equifax, and Experion. Another common one is your FICO score, which you get for free every month with the Discover IT card, which is another reason I picked it.
Regardless of what card you pick, be aware of the interest rates, late payment fees, monthly fees, and any rewards available to you, such as miles, cash back, or other benefits. And to keep an eye on your credit score, there are hundreds of free sites you can use, I use CreditKarma, but there are other sites out there you can use!
TL;DR : Credit is important to be able to buy a house, car, or rent a nice place. Credit scores tell people how good you are at paying money back, and if your score isn’t god enough you can’t have nice things like a house or a newer car or a nicer apartment. To build credit you can get a credit card, and use it to pay for small monthly expenses like Netflix or Chegg or your phone bill, then pay it off every month. Once you learn to be responsible you can start using your card more, but be sure to always pay it off in a timely manner to keep your score high, and avoid ever maxing out your credit card.