Why Establishing Credit Early is Important
Why to establish
Establishing credit early is important for every young adult in college that’s about to make that big life transition. Transitioning from college into the workforce is a big life change that we will all have to make at some point in our life. Credit can come into play very early after you leave college if it hasn’t affected you already. If you’re getting a credit card, buying a house, or buying a car there’s a good chance you’ll run into having your credit checked. When doing any of these things it is crucial to have a high credit score so that you can secure a lower interest rate. Other things that could cause your credit to be checked could even include renting an apartment or accepted a job with a new company. Whatever the reason, it’s always ideal to have a good record to show.
How to establish
One of the easiest ways to establish credit for someone that doesn’t have any yet would be to apply for a credit card. Most of the time college students that have little to no income will be given a credit card with a small credit limit of $500. They may also ask for a cosigner on the card as well if you are under the age of 21 or don’t have sufficient income. This would be the easiest way for college students. Many of you with student loans might not know this but if you do have a student loan you are already on your way to building your credit. That’s right, when you accept a student loan that is a form of credit that has been given to you and will help to start building your credit history once repayment begins. Some other ways that might be a little more difficult for college students to establish credit could include receiving a loan to buy a car or receiving a loan to buy a house.
What will affect your score
There’s 5 different things that make up and affect your credit score. Here’s what they are.
- Payment History 35%
Payment history will have the most effect on your credit score. This consists of your past payments and if you have made them on time or if they have been late, and if you have paid the amount due.
- Utilization 30%
When owning a credit card it is important to keep an eye on your credit utilization ratio. Here’s an example, if you have a card with a $500 limit and you’ve used $400 so far that means that you have a credit utilization ratio of 80%. Normally you want to keep this ratio below 30%, for a $500 credit limit card that would be $150.
- Length of History 15%
Here is where college students suffer when it comes to their credit score. Since we are so new to credit we haven’t had a chance to have time on our side. Length of history has to deal with how long you’ve had credit and loans. So, for someone who has had a credit card for 4 years starting when college started versus someone who just got one before graduating, you can see where you might run into trouble.
- Shopping for Credit 10%
If you shop around for credit too much this could start to hurt your credit score. Activities that will hurt your score if done to frequently consist of applying for credit cards, applying for car loans, applying for mortgages. These are known as hard inquires that have a negative impact on your credit score. Things that won’t hurt your score consist of when companies run background checks on you or someone checks your credit without your permission. An employer might also check your credit before hiring you. These are known as soft inquires.
- Mix of Credit 10%
Having a good mix of credit is also important. Having a mortgage, credit card and car loan will show that you have a good mix of different types of credit. The best many college students can really do right now is have a student loan, credit card, and maybe even a car loan.
At Powercat Financial, a peer counselor can help you to further understand your credit score as well as provide you with resources to view your credit score. In return, this can help you to build good credit. To schedule an appointment, go to www.k-state.edu/powercatfinancial.
Landon Warmund
Peer Counselor I
Powercat Financial
www.k-state.edu/powercatfinancial
