You might be asking why do I need a good credit score? When you get a credit card or get a loan, the bank looks at your score to determine whether you are eligible for the loan and what interest rate you have to pay. But did you know others might check your credit for your insurance, a job or renting an apartment? When I met up with a recent graduate, Adam, he told me about his credit score and what he did in his past to get the score he has today. “Credit has impacted my life after college, making decisions like buying cars and paying bills on time and how my credit score determines how I live my life. I believe to improve my credit score [I will need to use credit cards] less and pay the bills quickly. I had to make hard choices, for example, paying my bills and loan on time [instead of going] out with my friends.”
There are 3 main factors in how your credit score is calculated.
1. Payment history is the main factor that affects your credit score. It accounts for about 35% of your credit score for each of the scoring models. This means that you should ALWAYS pay your bills on time as agreed (https://www.creditkarma.com/credit-cards/i/ what-is-fico-score/, 2019).
2. The second factor is the amount of debt you owe, which accounts for 30% of your credit score (Skowronski, “You Might be Surprised What Impacts Your Credit Score”, 2019). That debt, also called your credit utilization ratio, is calculated by comparing your credit limit to how much of that credit limit you’ve used. Say you have no loans and a single credit card with a $200 balance and a $1,000 credit limit, your credit utilization rate is 20%. “It’s best to keep your credit utilization to less than 30% or definitely less than 50%”, says Skowronski.
3. The 3rd factor is the length of your credit history, which accounts for 15% of your credit score. Because of this factor, you may want to consider a secured credit card, a traditional credit card or a credit builder loan once you have a full-time job and are sure you can pay off your balance on time, in full each month to avoid interest charges. Do not to put more charges on your credit builder loan, credit card or secured credit card than you have in your emergency savings so you can always pay your balance in full.