Are you looking to rent an apartment with your roommates in the future? There are a few things you should know. To do things such as rent living spaces, buy cars, and buy homes, you need to have good credit. According to Credit Karma, “Being a responsible credit card owner shows you’re trustworthy” (Bieber, Christy). Credit is important to understand, especially as college students because we are preparing to enter the adult world. I am going to break down what credit is and why it is important. I will discuss tips on building a good credit score and explain the benefits of good credit.
So first, what is credit? As defined by Merriam Webster, credit is “the provision of money, goods, or services with the expectation of future payment”(Webster, Merriam). In other words, credit gives you the ability to buy things you don’t have money for currently. Credit is the exchange of money for a promise of a return on that money in the future. Credit can be used for houses and cars which are considered “good use” of credit.
However, credit cards can also be used for everyday items as well. Young people often use credit in this way to buy things they do not have the money for. The biggest trap is agreeing to open a credit card with stores like Macy’s, Nordstrom, and other department stores. We all know the deals are tempting but it is important to say no to these memberships or small monthly payments get larger over time which can be hard to pay off and result in the overdue payments acquiring interest. When planning your next shopping spree, keep in mind this is considered a “bad use” of credit.
Spending money with a credit card is okay if you know you can pay off the card each month. However, paying off the credit card you have should be done promptly. Most banks charge a fee for late payments. To give you an example, my Discover card would charge me $40 for late payment. As you can see, this is no small amount and would add up quickly if late payments were a habit.
Not only are there late fees but these fees acquire interest. As defined by Merriam Webster, interest is “a charge for borrowed money, generally, a percentage of the amount borrowed” (Webster, Merriam). To give you an example, my starting interest rate is 21.9%. Banks consider low credit scores a higher risk and are thus more hesitant to lend money to those people. By charging higher interest, they balance the high risk with a potentially high reward.
So what is a good credit score and how do you get one? Credit scores range from 300 to 850. A good credit score is anything from 670 and above. Anything above 800 is considered exceptional. A low credit score tells lenders you are more likely to have overdue or skipped payments. Now it is important to understand the factors that contribute towards a good score.
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Payment History- Are your payments on time? Even 1 or 2 missed payments can heavily impact your score.
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Utilization- How fast are you using your allotted credit? Lenders like to see less than 29% usage at one time because it shows that you are spending consciously.
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Derogatory Marks- These are things like missed payments, collections, repossessions, and foreclosures.
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Age of Credit History- How long is your account open? This goes back to the Macy’s example because lenders do not like to see that you are opening an account to get deals and then closing it right away. It is recommended to use an account for at least 7 years.
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Total Accounts- This is how many active credit cards you have. According to Temple University, “If you have too many credit cards, it can prevent you from getting other loans” (Student Financial Services, Temple University) .
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Hard Inquiries- Have you been applying for too much credit? This can also be alarming to lenders.
Aside from showing consistency with on-time payments, here’s some advice to start working towards a good credit score. I recommend establishing credit with a company that offers credit cards to college students with proof of enrollment. I use Discover and I know Capital One offers to students too. This is great to start because often there’s no annual fee and a cashback feature.
Second, start by downloading the app to your bank on your phone so you can monitor your credit. Most companies will make your FICO (Fair Isaac and Company) credit score available to you. These apps also offer helpful features and the convenience of being able to chat with representatives about stolen/lost cards and other issues.
Now you might be asking once you’ve established good credit, what comes next? Well, having and maintaining good credit is a good habit that will have long term benefits. To take the next big steps in life, credit is often involved. According to CNBC, a good credit score will allow you to rent living spaces easier, get better rates on cars and homes, enjoy rewards, and build a good reputation (DeMatteo, Megan).
If you were to purchase a house in the future, you might pay an interest rate of 3.5% to finance it over 30 years if you have good credit. So this should put into perspective how people with a good credit score will get a lower rate of interest which could save them tens of thousands of dollars. By using apps like Credit Karma, it is easy to understand your own credit history and score.
It is important to educate yourself on real-world responsibilities like credit because if misunderstood, the consequences can be burdensome. Most landlords require proof of a credit score above a certain number. This gives them the assurance that you have a history of paying on time. If living off-campus is a goal of yours, this is something you should be thinking about. The same can be said for cars and homes, as well as some loans, and even though they seem distant, now is the time to start planning.