The Truth About Your Credit Score

Credit can assist with major purchases like buying a house or a car. If you don't have enough cash on hand when you want to make the purchase (and most people don't!), you can take out a loan to borrow the money from a lender and pay the principle back with interest over a period of time.

Why Your Credit Score Matters

A credit score is a way for lenders to judge the risk involved in lending you that money. When you apply for a credit card, for instance, creditors will look at your history of paying money back and ask themselves: is she/he good for it?

You could be the most practical spender in the world, with money in the bank and your budget in the black, and still get declined for credit. Why, you ask? Because no credit means bad credit in the eyes of creditors. They have no credit history to view and therefore have no benchmark of your trustworthiness. They'd rather that you go prove that you're good for borrowed funds with someone else before they trust you.

So, if no one wants to trust you, how do you begin building a good credit history?

Start Building Your Credit History

It's really easy to screw up financially when you're out on your own for the first time. More than likely you'll be operating on a tight budget, and few people are actually prepared for proper financial management right out of high school. Here are some quick tips to help ensure that you won't be paying for a spring break trip to Europe for the rest of your life.

• Exercise Some Self Control. If you're venturing into the land of credit for the first time, be sure to avoid getting suckered in by campus credit card hounds who would just love to help you make ends meet. It's really easy to overlook ridiculous interest rates and annual fees when you have free money being dangled before your broke eyeballs, but DO NOT give in.
• Do Your Research. If you're happy with the service you've received there, start with the bank where you or your parents are currently account holders, and ask about your options. Most banks will offer a secured credit card that allows you to easily and safely begin building a credit history.
• Consider Piggybacking on your parents' credit when getting your first credit card. This means that you and your parents will be joint account holders, or they'll cosign for your account (meaning that if you default, they're responsible, too). If your parents have good credit, you'll already have a good foundation to build on.
• Put Your Lease, Utilities, and Cell Phone in Your Name, not a parent's. This way, you'll start a solid payment history tied to your social security number.
• Spend Wisely. When you do finally start to establish a credit history and begin receiving high limits on those cards, it can be oh-so-tempting to splurge, especially when you've been living on Ramen noodles for years. So go ahead and buy some veggies, but maybe hold off on a big screen TV. Read on for tips about how to manage credit funds the right way.

What Goes into Credit Scoring?

1. Payment history. How responsibly you repay your debts makes up about 35% of your credit score.
2. Credit history. How long you've been borrowing accounts for about 15% of your score.
3. Credit Inquiries. When individuals such as lenders and landlords check your credit report, it leaves a mark. Too many inquiries can be a bad thing. This makes up about 10% of your credit score.
4. Number and type of credit accounts. Too many open credit accounts can also be a bad thing. Some types of credit accounts, like student loans, are considered better than others in regard to your credit score. This section makes up about 10% of your score.
5. Debt to limit ratio. The closer your account balance is to the limit on the credit account, the worse off your credit score will be.
6. Total debt. If lenders think that you're already financially overextended, they can't responsibly give you access to more funds that you might not be able to pay back.
    

Tips for Good Credit

• Never exceed your credit limit. This is the quickest route to credit card hell: raised interest rates, a lowered limit, higher monthly payments, and penalty fees for exceeding your limit.
• Always pay at least minimum payment. If you can, pay more. Best case scenario: pay off the total balance each month to get an awesome credit score and avoid being charged interest.
• Always pay on time. If you do fall behind, contact your creditors immediately. Most creditors will work with you to create a reasonable payment plan.
• Carry at least 2 active credit accounts, but don't open more than 2 within 6 months. Keep in mind that this does not mean the more accounts the better. You'll be safe if you keep your number of credit accounts between 2 and 5.
• Maintain a low balance. Don't carry a balance on your account that's more than 30% of your credit limit; creditors can view that as excessive debt.

VERY IMPORTANT: All account activity (including missed or late payments) will remain on your credit report and continue to influence your credit score for 7 to 10 years! Perhaps you've wondered why all the cautionary advice? Now you know! Don't let mistakes now cost you far into the future.