Personal Finance

A credit score is a number ranging from 300-850 that depicts a consumer's creditworthiness. The higher the credit score, the more attractive the borrower. A credit score is based on credit history.

Excellent: 800 to 850

Very Good: 740 to 799

Good: 670 to 739

Fair: 580 to 669

Poor: 300 to 579

There are many different reporting agencies and companies that can report on your credit score but they are all based on the same factors. Starting from scratch means you will have a low score initially and need to build up trust before making big loans.

Deciding to open a line of credit is a big choice and should not be taken lightly. By opening a line of credit you now can build your credit before you enter the workforce and set yourself up for success. But, if you are not responsible, then you will set yourself up for failure and should strongly consider postponing this decision. Even if you are responsible, you need to keep track of your monthly statements to make sure you don't miss any payments.

Components of a credit score, sorted by importance:

(These percentages are how FICO, one agency, evaluates these)

•  Payment history (35%):

• DO NOT MISS PAYMENTS

• That's it, don't miss payments and you will be fine. Miss payments and you start a spiral of credit debt that accumulates interest. Most beginner credit cards are 26% APR, which is the amount of interest they charge ON TOP of what you already owe. Perhaps you simply forgot to pay but you have the funds, then pay it off immediately and be more careful next time. 

•  Total amount owed (30%):

• This is also known as revolving utilization. For example, your credit limit could be $2000. At the end of the month, you spend $1000 of that limit which results in 50%. This is BAD. You want your utilization to be <12%. There are two ways to alleviate this:

• Get a higher credit limit but this is tricky because students generally don't have a good stable income and have a very limited history

• Make multiple payments per month so your monthly statement is 12% or less. For example, I typically spend $700 of my $1750 credit limit per month. Just before my billing cycle closes, I pay off all but $20. Thus, my statement shows I owe $20 which is 1.1% and looks very very good.

• Length of credit history (15%):

• The average length of your lines of credit. 3+ years is good territory. Anything less is detrimental to your credit score.

• Types of credit (10%):

•  Loans vs credit cards, etc

• New credit (10%):

• How many credit lines do you have basically. This is kinda touchy because while it is natural growth to apply for more cards, doing so can also seem like a desperate money move.

Cashback incentives:

Many credit card companies have cashback incentives. This is to incentivize you to use their card when buying common goods and services. Some cashback can be 1.5% everything, or things like 5% off any dining expenses. Cashback is money you get with no strings attached! Of course, always remember there is no such thing as a free lunch.

Another disclaimer/recommendation:

IF YOU FEEL RESPONSIBLE ENOUGH TO OPEN A LINE OF CREDIT,  and want to work on your credit score here are some options you can exercise:

1. Contact your parents to see if you can become an authorized cardholder on their account. You will have to work out a system on how to pay your bills, but being under your parents’ is a good idea since they know what they are doing by now (hopefully).

2. Use Credit Karma