Personal Finance 101 for Students- Part 3 (Credit)

We are here in the final part of this financial 101 series and here to talk about credit. I’ll discuss what credit is, how to begin building it if you are new to it, how to recover from bad credit, and the perks that having good credit comes with.

So starting off, what is the best definition of credit? As per Experian (one of the three major credit bureaus), credit is simply defined “the ability to borrow money or access goods or services with the understanding that you’ll pay later”. This is ‘ability’ is usually marked as a number between 300-850 between three different credit bureaus (Transunion, Experian and Equifax) where anything below 670 is considered not good and anything above it is usually good.

As with everything in life, there are nuances so don’t take my previous statement at face value as there are good opportunities below 670 and you can still get denied for stuff even with a 740-760.

So what components compose a credit score:

  • Payment History (35%)= How well do you make monthly payments on accounts
  •  Credit Utilization (30%)= The amount of total credit you are using divided by the total amount of available
  • Length of Credit History (15%) = the average age of your credit based on all accounts owned.
  • New Credit (10%)= The amount of new credit you open within a certain period of time.
  •  Credit Mix (10%) = The different types of accounts you

You also that can negatively affect your credit score such as late payments, collections, charged off accounts (accounts closed due to non-payment), and etc. Just like a GPA, you can have many good things about your credit but the moment one of these hit your report, you credit drops markedly. So it is within our best interest to avoid these whenever possible.

So to begin building credit, you must sign up for creditkarma and assess where you are. This site will give you a rough estimate of where your transunion and equifax scores are at using the Vantage 3.0 Score (which has minor inaccuracies but can serve as a good estimate of where you with credit) If you are a student and received any form of financial aid that comes in the form of a loan, you already have credit setup most likely. If you are an authorized user on your parents credit cards, you already have credit. If you own(ed) a credit card, you already have credit. So its established but you need to solidify it.

  1.  Secured Credit Card: This is a card meant for individuals with limited credit history or bad credit history and is used to show that you are capable of handling your money and finances. It will usually require an initial deposit for the card which will act as a limit. From there, you will use the card as normal. Making purchases and paying it back every month on the right due date. It is recommended that you make purchases on the card that you would be able to afford with cash, that way you aren’t owing any money or carrying a balance which may accrue interest.After approximately 6 months or so, you may be asked to switch over to an unsecured card in which you will be paid back you deposit and own an actual line of credit. 
  2. Authorized User: If you are below 18 or have less than prime credit, you may be able to become an authorized user on someone else’s account provided that they trust you enough to do so. Usually this will be an account of a family member or significant other. You won’t be responsible for making any payments but all payment history, account balances, and length of ownership will be put on to your credit. So if you have someone with good financial skills to make you an authorized user, their good habits will theoretically pay off for you in the long run.
  3.  Increase you credit limit/Get a better card: After a while (6 months to a year) of consistently good habits you have two options:
  • Increase current credit card limit: Most banks usually offer an increase of some sort provided that you’ve maintained good habits. The purpose of this is two-fold: it provides you with more credit to leverage in many situations as needed. It also gives you more leeway with regards to your credit utilization I mentioned above. For example, if you only spend $50/month but have a credit card limit of $250, you would be utilizing approximately 20% whereas if you spent the same amount but have $500 limit, you would only be at 10% which helps you maintain a higher score.
  •  Get a better card: Here’s where the fun comes in, a lot of credit cards out there comes with cash back opportunities and other redeemable rewards. If you have a 720+ score for instance, you might be eligible for the Capital One Savor Card which means you are eligible for 4% cash back on all dining/entertainment purchases as well as a $300 cash bonus plus other opportunities and rewards. That’s a simplified example, other cards are known to offer travel benefits, access to special events and etc. So why not reap the benefits.

And then you pretty much wash, rinse, and repeat this process. If you have bad credit (as I once did), I would follow the following process:


1. Get an actual credit report: [annualcreditreport.com](http://annualcreditreport.com) gives you a free report once a year. You’ll want to see every derogatory remark on your credit, the monies owed, and etc that’s pulling your credit down.

2. Pay down your credit card debt: As you see in the calculation above, credit utilization accounts for a whopping 30% of your credit score so if your credit utilization is bad, you credit score is liekly not going to be good either. Setup a monthly budgeting plan to effectively pay off this debt without drowning in interests or monthly payments.

3. Make sure you aren’t late on any payments: Even if you make 98% of the payments on your accounts, it still isn’t a good range. Only 99% of payments paid and above is considered good.

4. Any sort of derogatory remarks on your credit should be disputed if there are any errors: People make mistakes of all sorts and sometimes you’ll end up with inaccurate reports on your account that you may need to dispute. A lot of times, collection companies will not follow up on these disputes and they usually get removed from your account. If there is any inaccuracy, I would attempt to dispute. If they even spell your name slightly wrong or the balance is off by a few dollars, dipsute it. It doesn’t hurt you in anyway to do so (unless you are disputing something that is fully accurate to your knowledge) and it is as simple as logging into credit karma and submitting a dispute. 

5. Try not to open up too many accounts at once: This not only hurts you because of something called a hard inquiry that is a negative remark but it also decreases the average age of credit which is not a good sign to credit lenders.

So why do you need good credit and what are the benefits? The short answer, credit runs everything financially. To truly leverage your financial standing in this country, its not about actually having a lot of cash, although that plays a role as well, its about credit. Good credit affords you the following:

  • Ability to borrow lump sums of money for major purchases that you may not have the immediate cash for: Houses, Cars, and Education to name the big ones
  •  You’ll be less likely to pay more money in the long term when borrowing for these things. Good credit holders usually qualify for lower interest rates and occasionally $0 down payments on expenses like those while those with less good credit will have to pay more upfront and in the long term.
  • Exploiting the benefits of high score credit cards is amazing. The amount of savings via cashback along with other personal benefits such as free travel, lounge and hotel access, and etc are unmatched and wouldn’t be feasible without good credit.

Anyways, I hope you enjoyed this last post. In August, I’ll be posting more academic stuff on how to study and etc so be on the lookout for that. Thanks for reading! 🙂

-Jay

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Dr. Daniel

Excellent stuff! The earlier we learn about finances the better.

3 months ago

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Dr. Dale

Wonderful.  Wish I knew more about this stuff as a pre-med!

3 months ago