By definition, credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. Credit is an important part of financial education for students.
When a business lends you money or provides you with credit, it is putting good faith in the fact that you will pay it back. As a student, you don’t have a long credit history, so the business is taking a chance on you. If you don’t pay it back on schedule – or at all- it will affect your ability to receive credit in the future - from that business and from others.
When you have “bad credit”, it can affect your ability to get a loan, a credit card, rent an apartment, or even get a job.
How do I establish credit?
An easy way to start establishing credit is to open a credit card. You will probably require a cosigner or proof of ability to pay. You must manage it properly to ensure you establish good credit. Don't incur unnecessary debt. Pay the entire balance every month. Utility bills, student loans, and cellular phone bills will also help you establish a credit history.
How does a credit check work?
When you apply for a loan, mortgage, credit card, or even or job you may need to complete and sign an application that grants an agent the authority to access your credit report. Based on your credit score and other information on your credit report, you may be accepted or rejected for a loan or purchase. Some employers view a credit history as an indicator of employee performance.
What is a credit score?
A credit score is a statistical figure used by creditors and other agents to determine a person's creditworthiness and probable ability to repay debts. Your credit score is based solely on information in your consumer credit report maintained at the credit reporting agencies. Credit scores such as FICO scores (the most common credit scores, developed by Fair Isaac) may range from 300-850. The higher your score, the more creditworthy you are. Persons with the highest credit scores are often entitled to savings such as lower interest rates or reduced fees. Information on your credit report that may affect your credit score includes, but is not limited to, payment history, amounts owed, length of credit history, new credit, and types of credit used.
How can I check my credit history?
The Fair and Accurate Credit Transactions Act of 2003 is a United States federal law that allows consumers to request and obtain a free credit report once every twelve months from each of the three nationwide consumer credit reporting companies, as listed below. In cooperation with the Federal Trade Commission, the three major credit reporting agencies set up a website, annualcreditreport.com
and toll-free number 877-322-8228, to provide free access to annual credit reports.
Experian 888.397.3742 experian.com
Equifax 800.685.1111 equifax.com
TransUnion Corp. 800.888.4213 transunion.com
Can I get my credit report for free?
Yes! Although there are some companies that may charge you for a credit report service, in order to stay in compliance with the Fair Credit Reporting Act, all credit reporting agencies (Equifax, Experian, TransUnion) are required to provide free annual credit reports upon request.
What is derogatory credit?
Derogatory credit can be the result of any number of transactions on an applicant's credit report that show unfavorable credit and/or payment history. Examples of derogatory credit are as follows:
- Default on student or other consumer loans
- Excessive delinquency (late payments)
- Excessive trades (high number of credit accounts)
- Thin credit file (small number of trades or very little credit history)
- Delinquent accounts or accounts in collection status
How can I improve my credit?
- Correct any mistakes on your credit report. You can do this by reviewing your credit report annually from each of the three national credit bureaus and contacting your creditors about errors. Keep in mind it can take up to 3 months to get errors corrected after you dispute them.
- Reduce your credit card debt. The amount of money you owe on your credit card vs. your credit limit can affect your credit score. By lowering the ratio of debt to available credit, you can improve your score.
- Make on time payments.
- Pay attention to the tips on how to improve your credit score on your annual credit report.
How do I maintain/establish good credit?
- Pay your bills on time.
- Avoid defaulting on your loans.
- There are options available to you to help reduce your federal student loan payments, such as extended repayment. Deferment or forbearance might also be available to you. If you are having trouble making payments on your student loans, make sure to contact your lender immediately to learn about available options.
- Regularly monitor your credit report. You many obtain a free credit report each year at annualcreditreport.com. Monitoring your credit report allows you to identify mistakes and identity theft early on. Dispute all errors.
- Limit the number of lines of credit you have in your name, especially revolving lines of credit, such as credit cards.
- If you are able to, pay off entire credit card balances each month. If not, pay as much as you can per month, even if it means making some sacrifices.
- Avoid bankruptcy.
- If you are maintaining balances on more than one credit card, avoid maxing one out while maintaining a very low balance on another. Try to keep moderate balances on each.