Like it or not, credit history and scores are big factors in our everyday lives. We have heard this phrase over and over throughout the course of our Peer Money Mentor Program, “Your credit can impact your quality of life.” It’s important to understand how to establish, maintain, and protect your credit. Some college students might have a low credit score simply due to their lack of credit history while others may have earned it from their lack of credit knowledge. Regardless of where you are in this credit game, we can help you build. Your credit score is like a muscle: it takes time and focused effort to grow it. Here’s a few exercises you can add to your credit-work-out so you can flex that score.
Pay your credit card in full every month
When lenders review your credit, they’re looking at how reliable you are with paying your bills. Are you paying your credit card bill late? Are you carrying a huge balance? You don’t want to do either of those things! To increase your credit score, you should always pay off your credit card balances in full, as well as on time every single month. This feels like a such a no brainer, but many people view their credit limit as an extension of their income. They end up swiping their credit card way too many times without having the funds to pay it all back. Carrying high balances will decrease your credit scores. What can we do to avoid this? The next credit-work-out will explain just that!
Keep your credit utilization below 30%
Did you know that a common mistake people make is using more than 30% of their line of credit? No wonder the average U.S. households in 2018 carried an average of $6,926 (according to NerdWallet). Let’s do some easy math to give you a picture of what we’re talking about. Let’s say that you have a credit limit of $1,000 on your credit card. If you’re concerned about your credit score, your balance should never exceed more than $300. It’s known that people with the best credit scores often utilize very low amounts of their credit. This tells lenders, like your bank, that you haven’t maxed out your card and that you use credit responsibly.
Become an authorized user (as long as you use credit responsibly)
Another way to boost that credit score is to become an authorized user on someone else’s credit card. While there are benefits to taking this route, you also have to be wary of the potential consequences if not utilized properly. Here’s what you should know before making ANY decisions. Being an authorized user means you have someone else’s card in your name. You can make purchases with it, but you’re not the primary owner of the credit card. To put this simply, the primary cardholder bears all of the responsibility. For example, your mom or dad, who has established great credit over the years, decides to add you as an authorized user. Your parent’s credit info and activities on that card will establish credit history for you and will be reflected on your credit report as well.
Don’t close unused credit lines
You might think you’re being responsible by closing that credit account you opened up when you were 18, but it will actually lead to a dip in your credit score. Your credit history has a direct effect on your score. Let’s say you opened your first account when you were 18 and your second when you were 23. Now you’re 25 and looking to purchase a car. If you had closed your first account, your history would only go back two years. This looks suspect to lenders, leading to a higher interest rate. It’s better to have a relatively inactive history that spans the course of your entire adulthood than it is to have a brief history, regardless of how well you’ve maintained your line of credit.
Get a secured credit card
Secured credit cards are ideal for beginners to the credit game and those that have made some major credit mistakes in the past. It’s like having a credit card with training wheels. Upon opening a secured credit card, you deposit an agreed-upon amount at your financial institution. The deposit is then locked away, technically still yours but you can’t touch it. That amount now becomes your credit limit and your deposit acts as insurance to the financial institution, ya dig? So you still make monthly payments on what you purchase with your card but if you are unable to pay them back, the bank uses your initial deposit to negate the balance owed. While this agreement is risk free for the bank, it can still hurt your credit score if you miss payments. It is intended to help you prove that you are better with money than your current credit score reflects, so be responsible with it.
Because your credit history and scores can impact your ability to lease an apartment, purchase a home, your car insurance rates, and even your ability to get a job, we suggest that college students get educated on how to establish, maintain, and protect their credit. To learn more contact ACC’s Student Money Management Office. They offer one-on-one financial coaching for ACC students at no cost.