The college life is the best time to build a good credit score. This’ll help you to settle in the real world after you move out of your college. Are you a college novice? Are you struggling to make your credit score better? Look below for a solution to your problem.
What is a credit score?
A credit score is a number which shows a person's creditworthiness. The cards you’ll qualify for are determined by your credit score. The FICO model is the most common formula, which determines your credit score. There are 5 main components of a FICO model, which calculate your credit score:
- Payment history - 35%
- Total outstanding debt – 30%
- Length of credit history – 15%
- Types of credit used – 10%
- Recent credit inquiries – 10%
Why do you need a better credit score?
6 reasons for having a good credit score are:
- To buy a house
- To buy a car
- To start a business
- To get a job
- To get low-interest rates
- To get better utility services
How will you build a good credit score?
College life is just the starting point of your financial journey. Since you’re a college newcomer, it’s quite clear that you don’t have much credit history. Due to lack of credit history, your credit score is comparatively low. This is high time to put your effort and give a boost to your credit score. Practice the below-given suggestions to upgrade your credit.
1. A line of credit is a must - You’re a beginner, so you’ve to create your credit history first. For that, you need to open a credit card or a savings account. Just be attentive towards your line of credit. Don’t overdo it, otherwise your credit score will drop.
2. Maintain a low utilization rate - Credit utilization rate is the amount of your credit limit up to which you can spend per month. For instance, if you’ve got a credit limit of $500 and spend $50 in a month, your credit utilization rate will be 10%, which is a part of what determines your credit score. If you want to keep your credit score happy, then always keep your credit utilization ratio below 30%.
3. Make payments systematically - Timely bill payments and a good credit score go hand-in-hand. So, pay your bills on time and also pay the full amount if you want to build your credit. You must avoid your credit card to buy something you can’t pay off on time. Remember, late payments affect your credit negatively.
Can’t remember the due dates? Are you falling behind your payments? Follow these two simple tips to pay your bills on time:
* You can set up an automatic bill payment system through your bank’s website,
* You can also automate your payments by making arrangements with each creditor.
4. Don’t use a card when you’re in debt - If you are already in debt, then don’t use your cards for further purchase. Otherwise, this would increase your debt load. Your first priority is to pay off the remaining balance. Once you pay off your balances, don’t close your cards. This would lower your score as well as clear your credit history. The score in the “length of credit history” category of the FICO model also drops down, if you close your credit card account.
5. Blend the use of credit - Credit mix is yet another factor which determines your credit score. There are two kinds of credit:
* Open-end or revolving lines of credit - Credit cards are the revolving lines of credit.
* Closed-end or installment loans - Auto loans and mortgages fall under installment loans. These have fixed payment amounts and a fixed payoff date.
Using a mix of credit types shows your ability to handle both cards and loans. This again acts as a “credit booster.”
6. Check your credit report - Mistakes are common. Credit bureaus can also make mistakes. So, don’t let these mistakes ruin your score. Review your credit report at regular intervals and keep it error free. Visit annualcreditreport.com to get your credit report for free.
Final suggestion
Maintaining and building a good credit score is not so easy. It requires some time and personal attention. College life is just the beginning of your financial career. If you follow the above suggestions, then you’ll definitely have a good credit score. So, start early and make your financial life successful.