Aside from your Social Security number, your credit score might be the most important number in your entire life. This number can literally make or break you, and the financial decisions you make while you're in college can affect you for years to come. Getting your credit history off to a strong start and learning to manage your credit is one of the best things you can do to help you achieve your dreams.
Importance of Credit
Though you might be used to paying cash for everything if you're just entering college, your college years will likely see you beginning to incorporate credit into your financial picture. Establishing credit is important because your credit file will be used to make decisions about virtually every aspect of your life. A bad credit history can convince banks that you're a high risk for borrowing money; furthermore, a poor credit score can be used by prospective employers as evidence that you're not reliable enough to be hired.
Composition of a Credit Score
Unfortunately, it's impossible to have a good credit score right out of high school. It takes time to build good credit, as evidenced by the way credit scores are comprised. One quarter of your score comes from the age of your accounts and the types of credit you have; these areas are impossible to score well in if you're new to credit. However, you can help yourself by paying your bills on time, which makes up 35 percent of your score. Your total outstanding debt makes up 30 percent of your score, so you can make your life easier by keeping your debt total low; however, any student loans in your name will count against your outstanding debt, even if you aren't responsible for paying them yet.
Establishing Credit
It wasn't so long ago that college students were bombarded with on-campus solicitations for credit. Thanks to reforms that went into effect in 2010, these promotional efforts are gone forever. In their wake is a system that makes it very difficult for you to establish credit. The new laws require you to meet strict income requirements, or have a co-signer, if you want a credit card before you're 21 years old. If you fall outside of these criteria, you may want to see if your parents will add you as an authorized user on one of their cards. Another option is a secured credit card, in which your purchases are drawn from a pool of money deposited by you, but your payment history is reported to the credit bureaus.
Negative Credit Information
Even if you've heard a million lectures from your parents about the pitfalls of credit cards, you still may find yourself getting into debt. It's important to realize that mistakes with credit don't just affect you now, they also affect you down the line. A simple late payment can stay on your credit report for seven years; while an isolated incident won't destroy your credit rating, repeated offenses will give creditors every reason to deny your applications for further credit. Learning to avoid these mistakes early will give you the best chance at a bright financial future.
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