College is all about learning, but one thing they don’t teach in the classroom is how to manage your credit. If you want to know what the difference is between a credit report and a credit score, or why you need to know that the first place, you’ll need to do a little independent study.
Not sure where to start learning about credit? We’ve built this guide just for you. It’s a crash course in the basics to help you ace good credit management by graduation day.
How to get a credit score
You have to have experience with credit products in order to have a credit history and score. If you don’t, the credit reporting agencies have no way to determine whether you will pay your bills in the future. You’re a risky customer because you’re unknown.
For a FICO® score, you need at least one account that has been open for six months or longer, and one account that has been reported to the credit reporting agencies in the last six months. They can be the same account. Also, your credit report must not indicate that you are deceased.
If you have bad experience with credit products, future lenders may look at that and determine that you may not honor your financial obligations. You’re a risky customer because you can’t demonstrate a history of handling credit responsibly.
Why your credit rating matters
Credit is a fundamental financial building block. You need credit to achieve goals both small and large, from renting an apartment to buying a car to getting a mortgage loan for a home. Even if those milestones are still a ways away, be ready for them. Establish your credit history while you’re in college.
Your credit standing is your financial calling card. It tells the financial world how you handle credit products.
When you approach a creditor for a loan or to apply for a credit card, they want to know your track record for using credit. If you don’t have an established credit history, or you’ve made financial mistakes, a lender might be reluctant to approve your application.
If you’re not able to borrow money, hitting your financial targets becomes a lot harder. A cosigner may be able to help you get a loan or rent an apartment but that’s not an ideal solution because it puts someone else on the hook for your financial responsibilities.
Borrowing without a cosigner, on the other hand, comes at a steep cost if you’ve got bad credit or a weak credit history. Most creditors charge higher interest and fees to consumers who look like a bigger credit risk on paper.
What is a credit report?
All of your credit information is compiled in your credit report. You have many credit reports, but the three most of us need to be aware of are issued by the major consumer credit reporting agencies Equifax, Experian and TransUnion.
So, what’s in your credit report? First, your credit report includes your personal details, like your name, address, Social Security number and date of birth. When lenders want to see a copy of your credit report, they access it by using your Social Security number. Your Social Security number is also necessary to apply for credit.
Your credit report also includes details about your credit accounts, such as:
- The types of accounts you have
- The names of your lenders or creditors
- Your account balances
- Your total credit limit for each account
- How much of your available credit limit you’re using
- Your payment history for each account
- How many times you’ve applied for new credit in the last two years
- The age of your accounts
- Information about collection accounts or public judgments
Generally, the kind of credit accounts that get reported to the credit bureaus include credit cards, personal loans, auto loans, mortgage loans, student loans and collection accounts. Some credit reports also show rental data.
If you’re still in school, your credit history may be limited to your student loan and little else. Even if your credit history is a bit on the short side, that’s still enough to generate a credit score.
How to see what’s on your credit report
There are a several different ways you can view your credit reports.
You can buy a copy of your report from each credit bureau any time you want.
To get your free credit report (often called your free annual credit report), visit AnnualCreditReport.com. This is the only website authorized by the federal government to provide you with one free copy from each of the three credit bureaus every twelve months. You don’t have to get all three on the same day.
You can also get a free copy of your credit report under certain other circumstances. Federal law says that if a creditor denies your application for credit, you’re entitled to request (for free) a copy of the report the decision was based on. The denial letter will have instructions for making your request, and you need to do so within 60 days of receiving the denial notice.
Some states also allow you to get additional copies of your report for free.
Any U.S. consumer can sign up for a free Credit Sesame member account to get a free credit report card, updated monthly. This personalized analysis of your credit history shows you:
- Your credit and debt information at a glance, based on the data in your TransUnion credit report
- Your credit score
- How you’re doing in each of the factors that affect your score
Experian recently rolled out free credit report access on its site, updated monthly. A score is not included.
What’s a credit score?
In simple terms, a credit score is a three-digit number that measures your credit health. Several different kinds of credit scores exist. The FICO® score and the VantageScore® are the most popular. Each brand has several different versions that have been introduced over time, and lenders must purchase the scoring system they use. Most lenders do not purchase the newest scoring systems immediately when they are released, so a variety of FICO® scores and VantageScores® are in use at any time.
FICO® and VantageScore® both range from 300 to 850. The higher your score, the better your credit rating. Besides making credit approvals easier, a higher score can also improve the odds of getting the most favorable interest rates when you borrow.
How credit scores are calculated
Every credit scoring model uses a different (and secret) algorithm or formula to calculate credit scores. For FICO® scores, for example, the breakdown is more or less as follows:
- 35% of your score is based on your payment history
- 30% of your score is based on your credit utilization
- 15% of your score is based on the age of your accounts
- 10% of your score is based on whether you have a history with different types of credit
- 10% of your score is based on the number of recent applications you have made
VantageScore® doesn’t offer a breakdown by percentages, but lets us know that the important factors are similar: payment history, the age and types of credit you’re using, the percentage of your total credit limit you’re using, your total balances owed, recent credit behavior and inquiries, and your available credit.
Both the FICO® and VantageScore® models draw their data from your credit reports, but since your credit reports may not match exactly, the scores lenders see may also differ. That’s because not all creditors report to all three credit bureaus. This is normal.
The important thing is to know the range your scores fall into. One score should not be drastically different from the others, and if it is, that could be a sign of an error on one credit report.
What’s a good credit score?
Many consumers want to know what a good credit score is. After all, your credit score can make or break your ability to qualify on your own for the credit you want.
Here’s how credit score ranges break down:
|Excellent||750 & above|
|Good||700 - 749|
|Fair||650 - 699|
|Poor||550 - 649|
|Bad||549 & below|
As you can see, you’ll need at least a 750 score to make it into excellent credit territory. It can take time to work your way there, especially if you’re still in college and have limited credit, but it’s worth the effort. Once you reach the 750 mark, you’ll have few obstacles to borrowing at the best rates.
What helps your score—or hurts it
Now that you know what goes into your score, it’s time to dig in a little deeper and learn what behaviors can help you improve your score and which ones may drag it down. Let’s start with the positives.
How to build a solid credit score
When you look at the factors that influence your score, the two most important are payment history and credit utilization. Credit utilization is the percentage of your total credit limit you’re using. If you have a $500 balance on a credit card with a $1,000 limit, your utilization is 50%. Utilization is calculated for each card and overall.
Taken together, payment history and utilization account for 65% of your FICO credit score.
With that in mind, two simple habits can bolster your score:
- Pay your bills on time every month
- Keep your credit usage to a minimum
A relatively easy way to get in the habit of making timely payments is to automate your bills each month. Another option is to set up payment reminders or alerts, or use a bill pay app.
Managing your credit usage (utilization) ultimately depends on how much you use your cards. Here’s where it helps to distinguish between revolving credit and installment debt.
Installment debt is a loan with a set payment amount and payoff date, like a student loan or car loan. Installment loans don’t factor into your credit utilization ratio.
Revolving credit is a line of credit you can make charges against and pay down over and over, like a credit card. The payment amount depends on your balance, and the payoff date depends on the payment. Revolving credit lines directly impact your credit utilization.
If you have a credit card that you use to cover everyday expenses, pay the balance in full each month if you can.
Best hack for keeping utilization low:
Here’s a trick you might not know about. Your balance is reported to the credit bureaus on or right after the statement closing date, which can be three weeks before your payment due date. If you’ve got a $400 balance on a card with a $500 limit, your utilization is 80%. That’s true even if you pay off the whole balance on the payment due date! To make sure your balance is as low as possible when it’s reported, send in your payment on the last day before the balance is reported each month (call the issuer to find out when this is).
Paying off the balance every month also helps you avoid paying interest. If you pay interest, everything you charge is more expensive. Don’t do it.
As for the other factors that influence your score, credit age counts. The longer your account history, the better for your score. If you open a credit card account in college, keep it open.
What can tank your credit score
Building up your credit can be hard work but it takes very little to tear it down. The easiest way to ruin your credit score is to pay your bills late. Once you’re 30 days late, your creditor can report your account to the credit bureaus and even one late payments can take serious points away from your score.
Overextending yourself on credit is another no-no. Maxing out your credit cards hurts your credit utilization ratio, and that drags down your score. Not to mention that it leaves you with a pile of debt you have to pay off.
Last, apply for new credit sparingly. Each inquiry can knock a few points off your score. Also, every time you open a new account, you lower the average age of all your accounts.
How to get started building credit in college
You have a few options for getting your credit history started while you’re in school.
Student card. If you’re over 21, you can apply for a student credit or a secured credit card. If you’re between 18 and 21, you can still apply but you’ll need to show proof of income to qualify. Some banks offer starter cards for teens younger than 18, and they generally require a parent to cosign.
As you compare cards, look at the fees and the annual percentage rate (APR). The APR is the annualized cost of using credit if you carry a balance from month to month. A higher APR means you’ll pay more in interest if you don’t pay in full each month. Fees come in all shapes and sizes. Your best bet is to start with a card that has no annual fee.
Also look at whether the card has a rewards program. Some cards offer cash back or points, while others offer miles on travel purchases. If you’re looking for a rewards card, choose one that lines up with your spending habits.
Authorized user. If you’re not ready to take the plunge on your own or you don’t think you’ll qualify, ask a parent to add you to one of their accounts as an authorized user. This allows you to reap the benefits of your parent’s payment history and credit utilization without having to qualify on your own. Just be sure you ask a family member who keeps a low balance and pays on time, or you won’t get much benefit where your credit is concerned.
Credit builder loan. A credit builder loan is a third option. With this type of loan, the bank keeps the loaned funds in an interest-bearing account. Once you repay the loan, the bank releases the money to you, along with any interest you’ve earned. Some banks release the funds gradually as you pay over time. Your positive payment history helps you build credit. Just remember that the interest you pay for the loan will be far greater than the interest you earn on the account. So don’t borrow excessively.
Check your progress
Once you’ve gotten the credit ball rolling, track your score to see your progress. Sign up for a free Credit Sesame account. As a member, you’ll get a free credit score, updated monthly, and a free credit report card that tells you what score factors to work on. You’ll also have access to free tools and resources that can help you continue growing your credit score through your college years and beyond.