Credit affects a wide range of important financial matters. Whether financing a car, leasing an apartment or applying for a job, the status of your credit can substantially impact what you and cannot get approved for. However for many of us, the most we ever hear about credit are those free credit report commercials.
Credit will likely be one of the financial matters to affect you upon setting out on your own, so college is the perfect time to start working toward good credit. One way is to establish some line of credit, and while there are many options for establishing credit, using a credit card is a common and simple first account to use on your own.
The most common type of credit card is the unsecured credit card, in which you put down no deposit and pay off your balance after the pay period. This is likely the card your parents or guardians have been using for as long as you can remember.
An unsecured card requires good credit standing, and while it is possible for a college student to qualify, other options exist if one does not qualify. For example, a lender may approve an application for an unsecured credit card, but only if someone with a better and longer credit history — ideally a parent — cosigns. If a parent in good credit standing is not a luxury you have, don’t fret, as other options exist, such as getting a joint account with your parents.
For those who want to improve their credit history but do not currently qualify for an unsecured credit card, the secured credit card may be a good option. Secured cards work the same as any credit card, except they require a deposit and have lower credit limits. Generally, the credit limit is the same as the upfront deposit, thus mitigating almost all risk for the lender. This lower risk helps approve the majority of these secured credit card applications.
The FICO Credit Score is made up of several elements with varying levels of importance. This is the makeup of one’s credit score, according to FICO (Fair, Isaac, and Company):
- 35 percent Payment History
- 30 percent Amounts Owed
- 15 percent Length of Credit History
- 10 percent Credit Mix
- 10 percent New Credit
The most important takeaway here is that paying credit card bills on time is the most influential factor in establishing and maintaining good credit.
“Paying financial obligations on time is the single most important thing an individual can do to maintain good credit score,” said Tracy Markovich, branch manager of PNC Bank’s Oakland branch. “However, various credit scores use proprietary algorithms which are not public and we cannot dictate or predict exact drivers of credit scores.”
It is true that credit score calculation is a complex process, and one cannot boil how to improve a score down to an exact science. But ultimately, a good first step to having a strong credit report is spending within one’s means, and at least paying off the minimum payment on time.
“Paying the minimum payment prevents derogatory payment behavior information from being reported to a credit bureau and builds good payment history,” Markovich said. “Paying the minimum payment will take longer to pay off a debt, while paying an additional amount above and beyond minimum payment or paying in full will lower the total interest paid for a loan.”
Don’t be afraid to ask your bank any questions you have about which particular method of building a credit score is best for you. As a student, this is probably new to you and your bank is there to help.
“PNC strives to take students from day one on campus through graduation, providing a solid foundation to take into their first job and beyond.” Markovich said.
If you follow any one of the paths mentioned in this article, you should come out of school ahead of the curve, and be on your way to financial independence.