by David Cecil–
The Real World outside the university may be years away for the majority of us, but that doesn’t mean you can’t prep before you’re sped off into the job force. Major expenses are commonplace right after graduation, whether it be a loan for the brand new car, a down payment on the stylish home or even the sparkling ring you gave that special someone after taking advice from Beyoncé.
To apply for most of these loans, however, you have to show you’re not the financial newbie fresh out of college. What you’ll need is a credit rating, and a good one at that.
Kentucky Telco Branch Manager Eileen Burden puts the idea of a credit score quite simply. “It’s a snapshot of what you do money-wise,” Bruden said. “It looks at behavior.”
This snapshot is presented in the way of a three-digit number, ranging usually from 300-850. This number provides lenders and banks with a way of judging the risk involved with giving loans out to individuals.
Burden also states that a credit score “proves spending habits based on past expenditures.” If that credit rating is on the lower end of spectrum, it means the person was not timely with their loan payments or still owes money to the lenders. This tells future lenders that there is a high amount of risk with that person, which means the company will produce higher interest rates for loans they provide.
If a score is high, however, a lender will feel far less risk is involved, and will give the individual a loan or credit account with a lower interest rate.
Since most people generally don’t like making it rain just for the outrageous interest rates, Burden detailed the five core areas that make up a credit score. More importantly, she discussed how to keep them on the higher end of the spectrum.
“The most important part is your payment history, and if you make your payments on time every time,” Burden said. This section makes up 35 percent of the score, and is highly affected by the second section: capacity.
Capacity is just the amount owed on your accounts and loans. With credit cards, this is the balance you owed when compared to the total credit limit set onto the card. Burden highly recommended that a credit user never max out their credit limit, and only use anywhere between 30-50 percent of the card’s capacity.
This credit ceiling is established for mainly two reasons. As Burden stated, “if something unexpected happens, then you have room to pay for emergency expenses.”
Furthermore, even if a person maxes out their card every month and pays it off in a timely fashion, it doesn’t help their credit score. This is because of capacity’s relation to payment history. Although the payments were on time, the cards were maxed out, which shows companies and lenders that risk is involved with this particular card user.
The next 15 percent of the credit score is based on the length of credit history. Unless someone’s been styling like Richie Rich since middle school, this part isn’t exactly helping a starting out college student, proving all the more that it’s better to get started as early as possible in establishing a sound credit account.
The final areas of the credit score are based on the accumulation of new credit and the type of credit used. Lenders will look at a user’s number of recently opened accounts and credit inquiries when evaluating a score. Moreover, they’ll also look into if you have brought yourself back into a positive credit history if you’ve ever had past payment problems. Your score is repairable.
With types of credit used, lenders will mainly look at how varied your current loans and credit services are. Burden discussed that these companies primarily wish to see more installment loans (loans usually for bigger purchases like cars and mortgages that have established repayment periods over a long period of time) and fewer revolving accounts (the style in which credit cards are established). If you have any finance company loans in your name, they’ll tend to lower your overall score. Both the accumulation of new credit and type of credit stand for 10 percent each of your final credit rating.
Major ways to improve and solidify your score are simple. By keeping the payment schedule on time and maintaining the low use of your card’s capacity ensures a steady score rise. Doing this continuously over time will only help the positive effect. Burden also made sure to note that you should not close card accounts, as this would decrease your capacity.
If you wish to view your credit report, you can access a free analysis of your score via the three major credit-reporting agencies; Equifax, Experian and TransUnion. By checking on your report every four months and following these guidelines, you can begin the trek towards a solid credit history with years of experience.