As a recent college grad, you’re used to being scored. In education, higher scores mean better grades. In the work world, these translate to more opportunities and greater pay down the road. Your grades in college can stay important for years to come. The concept of a credit score is much the same. A good credit score leads to preferred interest rates on loans and purchases.
On the flip side, a bad credit score can be devastating. And just like your grades in college, bad credit will follow you in your adult life. If you have a poor credit history, lenders will see you as a high-risk borrower and will charge higher rates–if they approve you at all. Some jobs will be closed to you as well since many employers use a credit check as part of their hiring process. You could even have a hard time renting an apartment. As you enter the workforce, it’s in your best interest to use your credit score to set you up for financial success.
What is a Credit Score?
Credit scores are three-digit numbers that give lenders an idea of the type of financial risk you are. Lenders prefer to approve loans to those who historically pay their debts on time. Your credit score lets them know if you can be trusted. There are several credit score scales, but most of them run from 350-850. The higher your score, the better your credit.
How Credit Scores Work
There are five factors contributing to your score and some matter more than others.
- Payment History- This is the single biggest factor, accounting for 35% of your credit score. Having even one late payment can significantly drop your credit rating, so it’s important to stay on top of all monthly payments.
- Amounts Owed- Accounting for 30% of your score, this factor looks at the amount of available credit you’re using. If all your credit cards are maxed out, creditors assume you’re unable to use credit responsibly.
- Length of Credit History- Making up 15% of your score, this looks at how long you’ve been using credit, and if you’ve successfully maintained responsible relationships with creditors over time.
- New Credit – If you’re opening many new credit accounts, this could hurt your score because it can implicate financial trouble. It’s 10% of your score, and you’ll want to keep credit inquiries to a minimum.
- Types of Credit – Lenders like to see different types of credit: installment loans, mortgages, and credit cards look better than just a lot of credit and store cards. This is 10% of your score.
How to Have a Good Credit Score
The single most important thing you can do to improve your credit score is to make on-time payments on all financial obligations. Being careful about how you use credit is also crucial. You’ll want to keep your credit card balances under 30% of your available credit. For instance, if you have a $5,000 credit limit, keep your balance on the card under $1,500. Don’t apply for credit unless you need it. In addition, look at your credit report closely for any errors, fraud, or other problems that can affect your score.
How to Build Credit After College
Many college graduates don’t have much of a credit history when they graduate, so it can be difficult to get credit right after school. There are a few ways you can start small and build a solid credit history:
- Open a secured credit card.
- Keeping your balances low.
- Always making payments on time.
How Do Student Loans Impact Credit Scores?
Your student loans have a direct impact on your credit. Since FICO—the main organization that views and rates your credit history—sees student loans as different than credit card debt or other loans, having a lot of student loan debt isn’t as bad as having a lot of credit card debt, especially if you’re making your loan payments on time. In fact, paying your student loans can raise your credit significantly over time.
That student loan balance can affect you negatively when it comes to taking out more credit, like a mortgage. Your debt-to-income ratio will be skewed by the large balance of student loan debt and can hinder your ability to get more credit, so it’s a good idea to pay your student loans off as quickly as possible.
It can be hard to build a solid credit history right after college, but following these small steps will get you on the right path to a high credit score. If you have questions about your credit or financial outlook, we’d be happy to chat with you! Schedule an appointment with one of our wise advisors today.
