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Students should start building credit

DRSeducation | pixabay

While struggling with schoolwork, college students tend to forget about a very important financial step that needs to be taken as early as possible in life. That step is building their credit score. A credit score is a number that sums up one’s financial history. The score range typically starts as low as 300, or very poor, to the highest score being 850, or excellent. 

The score is necessary for taking out loans and mortgages, looking for apartments and even applying for jobs, as some employers look at applicants’ credit when hiring. 

One should begin building their credit score as soon as possible. Despite the common belief, it is not difficult to build up with proper spending habits, and it is crucial for a great financial future. 

There are a number of ways to get started in building one’s credit history, according to an article published by Credit Karma. The easiest way to get started is to get a secured credit card from a local bank. A secured card is one for which the student would put down a deposit — which could be as low as $49, by some issuers, — and they get a card with a limit equal to that amount. 

Another way to start building one’s credit is by having a family member or a close friend make the student an authorized user on their account, although this could be risky if one or both parties do not pay their bills on time.

The different factors that affect credit score are payment history, length of credit history, average age of accounts, amounts owed and credit mix. Payment history makes up 35 percent of the credit report, being the largest factor. Therefore, it is crucial to pay all bills everymonth on time. It is also to one’s advantage to pay off the entire balance each month, so that they won’t have to pay any interest in the future. Amounts owed or utilization comes in second in importance, with a rate of 30 percent. Utilization is just a fancy way of saying how much of the available credit one has used. 

Creditors like to see that people have used 30 percent or less of what they have available to them. The more credit one uses, the more they are deemed riskier to lenders, as they are very reliant on credit to get by. 

College students should learn how to budget and use prudence with their finances. Students should not pay for what they can’t afford, and they should learn to spend only as needed. Learning to determine what is a need and what is a want will lay a solid foundation for any college student entering the workforce.

The next three factors affecting credit score include credit history, which is 15 percent of the score. The earlier a person begins their credit life, the longer their history will be. Starting a credit history at 18 years old rather than at 28 years old can save someone thousands of dollars on a mortgage later in life. 

Opening and using more revolving credit accounts like installment loans and mortgages represent the final 20 percent, each individually composing 10 percent of one’s credit score.

Credit can seem scary considering that most credit cards carry a high APR or interest rate on balances, and that the amount of credit card debt has reached an all-time high. 

The overall U.S. credit card debt reached $870 billion in last December, after rising by $26 billion in the last 3 months of the year, according to Bloomberg. 

CNBC found that many millennials aged 25 to 34 years old carry an average debt of $42,000 from credit cards. However, students should not let these numbers discourage them from beginning to build their credit score. It is a long-term investment in one’s future. 

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