Financial Wellness

Credit: Understanding the Basics

As an incoming student, it is very likely that you have not established credit and you may not even know where to start. We are here to help you break it down to make smart financial choices that will benefit you now, and long into your future.

Your credit is your standing as a borrower in the economy. The first step that you can do to understand your credit and see your current credit standing is to request a credit report. There are various resources that you can use to request a credit report, but a couple of free resources you can use include:

There are other tools out there.

Credit Report

A credit report is a detailed compilation of your credit history. Your credit report will contain personal information related to your employment history, your credit mix, and any line of credit that has been open or closed. We recommend that you check your credit report at least once a year to ensure that records are accurate and consistent through reporting bureaus, and to make sure that there isn’t any fraudulent activity on your report.

Credit Scores

Your credit is most commonly evaluated on a FICO scoring model ranging from 300-850. This number is referred to as your credit score, and it is a representation of how likely you are to repay debt. You can also look at it as an assessment of your credit risk at a single point in time with higher scores being less risky.

Since you will most likely be coming to school without any credit, it is important to understand where you need to aim for the future. According to Experian, credits scores above 670 are generally considered good, while scores above 740 are very good. Remember, that it can take a while to build credit so be sure to make smart financial decisions!

Components of Your Credit Score

Most financial institutions will use your FICO score to determine how much they will offer you and at what interest rate. This may be through home loans, auto loans, and credit cards, and understanding these components will help you in making informed financial decisions.

The five components of a FICO score include:

  1. Payment History (35% of score): Essentially, the component with the most weight looks at how reliable you are. It will look at any line of credit that you have, and evaluate if you have made consistent payments. The bottom line is that you should repay your debts on time.
  2. Debt Amounts (30% of score): Revolving lines of credits (credit cards) are usually weighted heavier with this component. FICO scores view individuals who rack up more debt as ones who may be at a higher risk. The general rule of thumb is that your credit utilization should not exceed 30% of your credit limit.
  3. Length of Credit History (15% of score): Basically, it looks at the starting point of when you first established any type of credit. A longer credit history can show that you are a more responsible, low-risk borrower.
  4. New Credit (10% of score): Opening a line of credit will often create a minor ding in your credit score. It is important to remember that new lines of credit should only be opened when it is financially feasible.
  5. Credit Mix (10% of score): Having a diverse credit history showing that you have/are repaying a variety of debt shows that you are accountable. Ultimately, it is about lowering risks. Being able to handle different types of debt does exactly that.

When is the right time to start establishing credit?

The easiest way to start establishing credit is by obtaining a credit card. Check with your financial institution to see if there are any opportunities for student credit cards that have no annual fees, low interest rates, and a potential period where interest does not accrue.

Also, evaluate your spending habits before acquiring a credit card and modify behaviors if needed. The last thing you will want to do is have a credit card that you are unable to pay off or use on unnecessary purchases.

If you can form smart spending habits, live within your means, and pay off your debt, then you may want to strongly consider getting a credit card. Establishing credit now will help you to make informed financial decisions in the future and prepare you for success beyond academics.