Your Credit Score Is More Important Than Your GPA
What do the following questions have to do with a credit score? White picket fence with a well manicured lawn or high-rise skyscraper with amazing city views? Sleek two-seater sports car or a four door sedan?
Most people will need to borrow some money at some point in order to purchase a home or a car. One of the important ways a lender decides to give you a loan is by looking at your credit score. A good credit score can save you thousands or even tens of thousands of dollars over the course of a loan. But a good credit score also takes years to build, so the sooner you familiarize yourself with it how it works and start taking steps to build your score, the better.
“Young people today are confronting ever-more sophisticated financial products and services than their parents did. Young workers have to decide about taking on debt, what to spend their money on, how to save and invest…” states Olivia S. Mitchell, executive director of the Pension Research Council.
As a student, you knew one three-digit number pretty well: your GPA. As an independent adult, the three-digit credit score will be important to shaping your financial future. Let’s take a closer look to understand it better.
Any amount of borrowed money is called credit. If you can’t pay for something today, then you may be able to use credit and pay the money back in the future. Using a credit card to shop or taking on a loan for school are two ways in which you use credit. You are making purchases today but will pay for them later. Even if you choose to use credit cards for the rewards but have the ability to pay for your purchases right away, you’re technically still using credit because you won’t pay your bill until days or weeks after your purchase.
There’s a Score?
Your credit score basically measures how well you treat borrowed money. Will you pay it back on time or will you miss some payments? The higher your credit score, the more likely you are to pay borrowed money back.
How Do I Get Scored?
Your score is complicated since there are various factors that can affect it. For an in-depth view on each of the below components, check out our FICO Credit Score 101 posts:
Who’s Scoring Me?
There are three key scorers in the United States known as credit bureaus or consumer reporting agencies. They gather credit information on you, analyze it, and sell it to the creditors, who are actually deciding whether to give you credit.
Who Are Creditors?
Creditors are companies or institutions which lend you money. The most common examples of these are banks, credit card companies, or mortgage lenders. Creditors decide whether you get credit and if so, how much and at what cost.
Yes, There’s a Cost for Credit…
The agreement to give you money today comes at a cost. Typically, the cost is in the form of an interest rate. The rate is applied to the amount of money you have borrowed. The higher your credit score, the lower your interest rate may be. If you borrowed $100 and had an interest rate of 4%, then at the end of one year you would owe $104. If you had a rate of 12%, then you would pay back $112. In this example, the difference in the interest rates at the end of one year was only $8; however, over time, the difference in rates could cause additional costs to become much larger. An individual with good credit vs. one with bad credit could at the very minimum pay thousands of dollars more in additional charges.
What Can I Do About Credit Today?
You can take small steps to grow more comfortable with credit. Here are some tips on how to manage your credit:
- Avoid late payments
- If you can’t pay your bills on time and become delinquent, these are potential red flags to creditors
- Set a budget
- Do not use credit to live beyond your means
- Keep low credit card balances
- Credit cards come with limits. You cannot charge more than this amount. So, if you have a card with a $1000 limit, you can demonstrate your responsibility by charging $600-$700 and paying off this amount each month as opposed to charging $900-$950 repeatedly. By charging close to the limit, creditors may think that you are charging more than you can pay.
- Create a consistent lifestyle
- Keep things such as a job and a location of residence the same for a period of time. Creditors like to see stability in your routine.
- Have sufficient credit
- Secure a credit card limit that meets your needs. One credit line of $1500 is better than three lines of $500 each.
In your early twenties, it is important to start building credit because you may need to borrow money later. Many major personal milestones such as returning to school for graduate education, buying a home, or purchasing a car may be accomplished by borrowing money. By the time you’re ready to make that major purchase, you’ll have some credit history, which will allow creditors to make a more knowledgeable decision about lending to you.