Graduates Guide To Credit
Just when you thought grades were behind you, life throws you a curve ball. Instead of A’s, B’s, C’s, D’s, and F’s, you will now be judged, in part, based on your credit score! After you’ve sorted through all your sweet gifts, had the fun parties and celebrations, there will come a time (probably right about now) when you’ll have to start supporting yourself and learning how to manage your money wisely, and the financial ropes of the real world.
When people talk about credit scores, they’re usually talking about your FICO credit score. FICO stands for Fair Isaac Corporation, the company that created the closely-guarded FICO score equation that is most commonly used today. What’s funny is that in reality you have three different FICO scores because there are three different credit bureaus that collect information about you – Equifax, Experian, and TransUnion. Your FICO score is calculated based on the information they have on you, so it’s important for you to make sure they have accurate information.
Why Your Credit is Important
Your credit score and credit history is important because so many businesses make decisions based on that score and report. We all know that lenders use this information to figure out whether they want to loan you money and at what interest rate. However, did you know that your credit history is used by employers, landlords, cell phone and insurance companies? Your score is being used in more and more unexpected places.
What’s In Your Score
While Fair Isaac Corporation doesn’t publish the actual equation, they do set out guidelines for how the FICO score is calculated. They name five broad categories and their weightings:
35% — punctuality of payment in the past (only includes payments later than 30 days past due)
30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit limits
15% — length of credit history
10% — types of credit used (installment, revolving, consumer finance)
10% — recent search for credit and/or amount of credit obtained recently
The two largest categories are your payment history and how much debt you have. The longer your payment history the better, which means it pays to get a credit card early and show that you can be responsible with it. Being responsible means you charge a little and pay it off regularly, without missing payments and without going over the limit. The amount of debt relative to your total credit is known as credit utilization, the higher the percentage is the lower your score will be. If you want to learn more about it, I have written an extensive article on how your FICO credit score works.
Check Reports Annually
The Fair Credit Reporting Act lets you get a copy of your report from each of the three bureaus every 12 months. You can request your reports at annualcreditreport.com. Don’t go anywhere else for your free credit report! As a new graduate, this is probably the first time you’ll have seen your report so I recommend that you request all three to check for errors and inaccuracies. In 12 months, when you’re eligible for a free copy again, I recommend staggering your requests every 4 months. So you’d request an Equifax report, wait four months, request your Experian report, wait for months, then request your TransUnion report. After four months, you repeat the cycle all over again.
If you see a problem or error, dispute it immediately. Disputes can take months and it’s important that your report is accurate in case you need a car loan or mortgage. You don’t want to have an open dispute while you’re applying for a new loan!
Don’t Stress Over Your Score
While your score is important and establishing a credit history is very important, don’t stress over the score itself. As long as your score is an accurate reflection of your credit worthiness, you should be happy and doing the things that you know will improve it. If it’s a little low because you were reckless with credit, act responsibly (on-time payments, don’t go over the limit, pay off your balance), or ask for money management help and your score will improve over time. There are plenty of places that will give you free FICO credit score if you agree to certain trials but those are only necessary if you plan on getting a loan in the near future. If you don’t, you can use FICO score estimators instead.