Building a credit score? In this economy?

What is a credit score, even?

A credit score is a number, typically ranging from 300-850, that evaluates how much risk there is in lending a person money based on factors such as payment history, amounts owed, length of credit history, new credit and credit mix. Your score falls into a range that may be considered poor, fair, good or excellent, and the higher the number is, the better your score.

 

You might not know that you have more than one credit score, but in fact, you have (or will have) several. According to Credit Karma, the two primary scoring models are the Fair Isaac Corporation (FICO) and the VantageScore. FICO was originally founded to create a standardized credit score, and Equifax, Experian and Transunion put together VantageScore Solutions as an alternative. While all of these scores are important, Credit Karma cites FICO as the most common credit reporting agency used by lenders in the U.S. 

 

Pay the interest on your student loans — now 

Student loans are actually good for your credit. According to Experian, student loans are a type of installment loan, or “a loan that you’ll repay with regular payments over a predetermined period.” They are helpful in that they are a different type of credit than credit cards, classified as “revolving accounts,” that are repaid over an indefinite time period. So, they add to your credit mix and boost your score. 

 

However, missing any student loan payments will hurt your credit, and a higher ratio of money owed to money originally borrowed can too. You can decrease the likelihood of these factors hurting your score by paying interest on your unsubsidized federal student loans. Interest rates apply to unsubsidized loans immediately, and the interest snowballs, meaning the interest is calculated based on the new balance owed each time rather than the original amount. Therefore, paying interest not only helps mitigate the risk of missing future payments due to financial instability, but also decreases how much you will owe in the long run. Because of the nature of this interest, even paying off some of it month by month helps.

 

Apply for a secured credit card

To build credit, you have to prove to creditors that you are reliable and to do that, you need to show you can regularly pay off a balance. While it can be tough for college students to be approved for a credit card, there are cards out there designed for building and rebuilding credit. With a secure card, you supply your own credit line through a — usually refundable — deposit. Some secured cards are worse than others in terms of annual fees or minimum deposit required, but NerdWallet has compiled a list of the best secured cards for different purposes: https://www.nerdwallet.com/best/credit-cards/secured

 

Secured cards function just like a regular credit card in that they report to major credit bureaus. This is great for building your score, but be sure to spend below 30% of your credit line lest you harm it. According to NerdWallet, spending 10% or less is even better.

 

One step at a time

While you may be eager to start building credit right away, you should still proceed with caution. Opening a new credit line usually requires a hard inquiry, and your credit score might take a hit. That’s perfectly okay, but if you apply for several credit cards at once in the hopes of getting approved for one, the damage will grow much deeper. That said, make sure you do your research into which card is best for you, and if you don’t get approved for whatever reason, be sure to wait a while before reapplying. For a thorough run-down of other credit mistakes to avoid, check out CNN Money’s Credit Score Killers: https://money.cnn.com/2010/03/23/pf/credit_score_killers/.

Photo: Square Inc.

Leave a Reply