Credit score. It’s a really important number that a lot of college students are clueless about. That’s why we decided to give you the facts about it. We interviewed Michael Gutter, the University of Florida Associate Dean for Extension, who is an expert on financial education. Read on to learn what credit actually is and what you can do to take charge of your financial future.
HC UFL: What exactly is a credit score?
Gutter: “A number that is based upon data that is compiled from a report that you have on your credit. Basically, they look at things like your payment history, how much debt you have, have you been late on stuff, how many credit cards you have, how long you have had them, factors like that. They use all that data, like a good researcher would have done, and created a score on that which would say how risky would it be to lend you money.”
HC UFL: What’s an ideal credit score?
Gutter: “There are several different scores actually, but usually people are referring to one score – the FICO credit score, the Fair, Isaacs and Company score. The best score is 850, that’s a perfect score, and that’s silly when people think it matters. Being at an 850 is hard to do and that can change every day based upon simple things like how much interest is on your credit card. What people need to do is strive to be in prime lending, or accredit as some people call it, and there you are looking for scores of 750, 780 or higher. You should have no problems doing most types of transactions, getting favorable rates on mortgages and good rates on car insurance. All the most important transactions of your life will go that much smoother when you have a great credit score.”
HC UFL: What can a credit score enable you to do?
Gutter: “A good credit score allows you to have better choices on the things that you are trying to do. A bad score, on the other hand, can limit you on the things that you’re trying to do, and that’s not just about borrowing. For example, different types of employers include a credit check upon hiring. If you got a job in financial services, they definitely do because if you’re giving advice about credit, it shows if you’re qualified to do so. Bad credit scores mean you’re compromised because you’re desperate for money.”
HC UFL: What are some ways that affect our credit score that we may not know about?
Gutter: “I cannot say this enough – college students should understand what goes into their credit record and their score so they make good choices. Your credit score is only affected by transactions that have to do with borrowing money or somehow engaging in contracts with people. An example other than loans would be if you signed up for a cell phone contract and you didn’t pay for your bill. They will report you to a credit reporting agency and then collections will be sent to you. Paying your bill on time doesn’t affect your score but not paying hurts it.”
HC UFL: What can college students do preemptively?
Gutter: “One thing I tell people is that if they’re afraid of telling their significant other or parent about getting a credit card, it’s not a good sign. It shouldn’t be a hidden secret. When we make credit something we don’t want to talk about, that’s not a good start. If you’re under 21, you have to have that conversation with your parents to even start building credit in most cases, so do that. Have them involved in that process to keep yourself honest your first year or two. If you hide it from then, you don’t get any help unless you get into trouble. Asking for help before the trouble begins is easier to deal with. We have to be willing to own up to that and have those conversations.”
“As a college student, the number one thing I say is that if you have access to credit – it is never a source of generosity. This happened in my fraternity if a guy got a new credit card, he would take everyone out. We get it, you want to hang with your friends, but hang out with your friends, who have acknowledged they can’t afford to go out at home instead of taking on debt for them.”
HC UFL: What are ways college students can start becoming financially responsible now?
Gutter: “Make a budget, in other words, get financially organized. Know where the money you are paying for things are coming from. Don’t start taking money out and borrowing to spend money when you don’t know where your money goes. It just worsens the debt even further. Then, think about how you use credit now and how you will use it in the future.
Set limits on yourself, like how much you’ll spend on a card, which should be 30 percent of whatever that card’s limit is. If you have a balance above 30 percent of the limit for a prolonged period of time, then your credit score will really start going down.
Also, pay more than the suggested minimum payment on your credit card bills. Credit cards have interest, and if you only pay the minimum, you’re not really making any progress in paying it off. If you do the math, the interest is just increasing the balance if you only pay the minimum.”
HC UFL: I’ve heard about the five factors of a credit score. What does that mean?
Gutter: “35 percent of your score is based upon your payment history, so number one factor affecting your score is are you late or are you on time. If you’re paying on time, score goes up. If you’re late it, it goes down no matter what else you’re doing.
30 percent is based upon your capacity usage. So if I have a thousand dollars-worth of credit or if I can borrow up to a thousand dollars and I borrowed a thousand dollars I’m using one hundred percent of my capacity. That makes you look riskier. Right. Because now I’m maxed out my debt. So when I ask you for more credit what do you look like to me. More desperate. If you have multiple cards, a ding will happen from individual cards and not from 30 percent from all cards’ capacities added together.”
Overall, growing your credit can definitely benefit your financial future when you know what you’re doing. As long as you’re informed, proactive, and patient, spending with credit can be a rewarding practice. Take these pieces of advice into account in regards to your own finances — and be assured that it’s normal to have questions when it comes to credit (and all things adulting). You’ve got this, collegiettes!