College is a great opportunity to fix and set up your finances before taking a step into the real world where mortgages, financing, loans, and credit matters most.
The average credit score for a college student is not bad at all but if you’re concerned about boosting your finances and opening up more financial opportunities by improving your credit score both during or after college, read further.
What is an Average Credit Score for a College Student?
Most people in college are around the age of 18 to 24. The average score for that age range is about 630 on the FICO Score according to CreditKarma. This average is pretty decent and puts you in the “fair” bracket by FICO Score definition.
Yeah, you’ll be approved for some form of credit but don’t expect too much with the average score. If you’re looking to buy a car, you’ll probably be able to get one but if you’re looking for a house, you might want to boost your credit score a little bit more.
Are Student Loans Calculated in Credit Scores?
Student loans are a form of installment loans that require an agreed-upon amount of payment for a certain period of time.
Getting a student loan does not affect your credit score but be careful, the late payment of your loan could have a negative effect. Student loans do not expect applicants to have existing credit scores.
How the FICO Score Computes Your Credit Score
The FICO score was created by the Fair Isaac Corporation and is the most commonly used by banks and other lending companies as a way of computing a person’s credit score.
35% Payment history
30% Credit utilization
15% Length of payment history
10% New credit
10% Credit mix
Bills. Bills. Bills. Everybody hates paying bills but look at it as an opportunity for you to improve your credit score. A simple habit of paying your bills on time could have a positive effect on your growing credit score.
If you haven’t heard about the credit utilization ratio, this refers to how much debt you have in comparison with your credit capacity or maximum credit allowance. Having a ratio under 25% is ideal for your credit score.
Let’s say your credit limit is $10,000 and you spend $3,000. This means that your credit utilization ratio is now 30%. In order to achieve a ratio under 25%, you would have to spend less than $2,500 on this credit limit.
Sometimes you won’t be able to help going over 25% and that’s okay. Just make sure to pay it off and decrease your credit utilization radio before the end of your statement.
Length of Payment History
There’s not much you can do to increase the length of payment history so don’t be too bothered since this part naturally develops over the years. A key way to improve this part is to never shut down your old accounts, even if you aren’t using them.
If you’re mass applying for credit cards and plan to get maybe three during your first week in college, you might want to take a step back and rethink your decision.
Applying for new credit cards or even new credit products way too often affects your credit score in a negative way. The safest period to apply for a new credit card would be at least six months apart.
Credit mix means having different debts within your credit like mortgage payments, car loans, and other forms of financing.
Generally, the more diversified your credit mix is, the better your credit score becomes. Of course, you wouldn’t want to apply for a mortgage or buy a car prematurely just to increase your credit score.
How to Graduate College with a Better Credit Score
Get a credit card
If you haven’t got a credit card, now would be the perfect time to get one. Different credit cards have different requirements and obviously offer different benefits as well.
There are credit cards out there like Capital One platinum that are easy to get even without an existing credit score. The good thing about this card is that you can increase your credit limit after five months of consistent payment before the deadline.
Set up automated payments
Paying your bills on time goes a long way but you can actually talk to your bank about setting up automated payments if possible. If not, try to get as automated as you can by simply putting a reminder on your phone or calendar.
Pay your rent with a credit card
Ask your landlord if it’s possible to pay your rent through your credit card. Most apartment complexes don’t allow this, but it doesn’t hurt to ask! This is a technique to cause activity within your credit card without really causing any harm to your total finances since rent is already part of your budget.
Try to put every other regular payment like maybe a membership at the gym or anything else that’s already part of your regular budget on your credit card instead of paying with cash.
Improve your credit utilization ratio
Just like how the law of increasing capital is about increasing your inflow (increasing your earnings) and decreasing your outflow (decreasing your spending), the law of increasing your credit utilization ratio is about increasing your credit limit and decreasing your debt.
You can either focus on one side of the coin but it is better to focus on both sides in order to effectively increase your credit utilization ratio faster.
The road to financial success after college means going above the average 630 and aiming for a higher credit score. Things can get a little bumpy along the way but with proper planning, patience, and precise execution, you’ll graduate with a better credit score.
Buying that first car, that first house, or even starting that first business is not too far away.
Buying the first house is a big move for anyone unfamiliar and without prior knowledge of mortgage types, credit scores, and other financial procedures. The best way to buy a house is to find out the needed credit score for the perfect mortgage and consistently work towards it.
If you’re wondering what is the minimum credit score or the minimum down payment needed to buy your first house, you’re in luck! The answer might surprise you.
What credit score do you need to buy a house in 2020?
Optimistically speaking, having a credit score of 740 is ideal for getting favorable terms like lower interest, bigger loan limit, and also faster approval.
The minimum credit score, on the other hand, would be 580 for a basic FHA loan. Juggling from the minimum to the ideal 740 might just give you the nudge needed to boost your credit score even further before taking a mortgage.
What is the easiest mortgage to qualify for?
If you’re looking for the fastest approving mortgage, this really depends on your available credit score or the type of mortgage provider you choose to get your loan from.
When it comes to the minimum credit score requirement, the FHA loan would be the easiest mortgage to qualify for. However, the low requirements come with certain limitations like the loan only being applicable for basic housing and not for rental properties, primary residences, and vacation homes.
The three mortgage types
There are three mortgage types to choose from but one of them is a special mortgage that can only be approved under special circumstances.
There are three different mortgages with different credit score requirements.
VA Home Loan
Just to be clear, the government does not secure conventional mortgages or conventional loans. These types of mortgages are given by private lenders but there is an exception.
Both the Fannie Mae and Freddie Mac are government-sponsored private lenders so if you’re for a little more security with a conventional mortgage, pick one of both.
Here are a few things to keep in mind when choosing a conventional mortgage:
Low down payment and low-interest rate
15 to 30-year mortgage terms
FICO®Scores of 620 required
Key takeaway: Conventional mortgages can be used for properties aside from housing. This includes rental property, primary residence, or even a vacation home.
FHA loans, otherwise known as Federal Housing Administration loans, were created for the general public as the government’s way to provide a bridge between those with poor or no credit score and the housing they deserve.
This type of loan is insured and less risky. They are also much easier to qualify for compared to conventional loans.
Here are a few things to know about FHA loans:
Down payments as low as 3.5%
Helps current homeowners’ problems on their existing mortgage
FICO®Scores of 580 required
Note: If you’re wondering what type of problems current homeowners might be experiencing, this could refer to additional renovations or extensions.
Here are a few things to watch out for:
Different lenders might have different credit score requirements
Standard FHA loans require a minimum of one credit score
Applying with your spouse means the lower credit score will be the determinant
Key takeaway: The advantage of an FHA loan is that despite a high debt-to-income ratio or even no credit at all, you might still be able to apply for a mortgage.
VA Home Loans
The U.S. Department of Veterans Affairs insures VA Home Loans and are regarded as the loans with generally the best deals on the list. Although this loan has amazing benefits, there are only two ways to get it.
Here are a few advantages of this loan:
No downpayment required
Lower average interests
Available to people with low credit scores
No charge for private mortgage insurance
Here are a few things to watch out for:
Private lenders may vary in minimum credit score requirements
May include a one-time fee
To hasten the process, you must have a FICO®Score of 620 onwards
Key takeaway: In order to apply for this loan, you must have served or are currently serving the U.S. Military, the Military Reserve, or the National Guard. The other way to get this loan is if you are a spouse of a deceased military member.
If you’ve already made the decision to buy a house, you’ll have to move fast and try the following methods for a quick fix.
Clarify credit report
Check your credit report for any mistakes that could be the reason for a lower credit score. If you see issues, you may want to dispute the inaccuracies with the bureau associated with the error.
Ask a family member to help you out
If you have a family member with a good credit standing and they agree to add you as an authorized user of their credit card, you can use this as the measurement of your credit score.
Oh yeah, if the primary owner of the card makes a payment, your credit score gradually goes up as well!
If you aren’t in too much of a hurry and don’t mind gradually scaling up your credit score, there are long term fixes that can help you solidify your growing credit score.
Pay bills on time
A simple on-time bill payment could actually boost your credit score after a while. If you have a difficult time paying your monthly dues on time, try setting a reminder on your phone or calendar, or if it is available, set up autopay so you don’t even have to think about it!
Fix your credit utilization ratio
A credit utilization ratio talks about the amount of debt you’ve incurred in comparison to your credit limit.
Slowly paying off your debt and leaving more credit room untouched lets you gradually build a cleaner credit score.
If you’re aiming for just the minimum credit score to buy your first house, you’ll need to have at least 580 to qualify for an FHA loan. If you lack in the scoring department, don’t worry; apply the short term and long term techniques to fix your credit and work towards your first house.
Build your credit score just how you would your first house. Planned. Prepared. Patient.
We all know that the key to a successful financial life is good credit. Buying a home, securing sizable lines of credit such as auto or personal loans, and getting approved for credit cards, all hinge on your financial credibility. Even winning certain contracts or leases can depend heavily on your creditworthiness.
But how exactly do you earn credit, and what is the difference between a good score and a bad score? What credit scores are actually considered good? Knowing the answers to these questions are the key to maintaining high creditworthiness and increased chances of being awarded new lines of credit in the future.
Although FICO and VantageScore are the primary credit scoring models used by credit bureaus to calculate your credit score, most lenders use a large variety of similar scoring models to come up with a score that mirrors what FICO or VantageScore would generate. So, when you obtain your score from one scoring model, you can feel pretty confident that your score won’t be that much different when calculated using another model.
These scoring models will assign your creditworthiness with a number between 300 and 850. Your score will fall somewhere along with this range. Generally speaking, according to Experian, one of the three primary credit bureaus, here is what you can expect to see:
800 credit score to 850 credit score = Exceptional
740 credit score to 799 credit score = Very Good
670 credit score to 739 credit score = Good
580 credit score to 669 credit score = Fair
300 credit score to 579 credit score = Very Poor
The majority of Americans have credit scores that fall between 600 and 750. Scores that are within the exceptional category often require a delicate balance of debt to credit ratio and lines of credit quantities to maintain such a high score.
The range of credit scores across America actually seems to be evenly distributed. Less than 1/5 of the population has, what’s considered, very poor credit. People who fall in this category are often required to pay higher fees, higher interest rates, submit a deposit or be denied credit altogether.
Roughly 1/5 of Americans have fair credit, a score between 580 and 669, according to Experian. These individuals are usually subject to subprime loans. Subprime loans are those granted by lenders that contain interest rates that are higher. This is because people with credit scores between 580 and 669 may have blemishes on their records that indicate they carry a higher risk of defaulting on a loan in the future.
Individuals with a good credit score, which is between 670 and 739 according to Experian, make up another fifth of the population. These individuals have a much better chance of getting a good interest rate on future loans or lines of credit because they carry a much lower risk of defaulting on a loan in the future.
Those people with credit scores that fall between 740 and 799 are considered to have very good credit. They make up almost another fifth of the population. These individuals are certain to be offered a better than the average interest rate on any line of credit for which they apply.
The last fifth of the population has a score of 800 to 850. These borrowers are guaranteed the most exceptional rates and lending terms on any lines of credit they pursue.
The three major credit bureaus (Experian, Equifax, and Transunion) calculate your credit score primarily using two main algorithms: FICO and VantageScore. These two algorithms differ somewhat on how they weigh different factors, but not enough to really justify any distinguishment between these two scoring methods.
Looking at what factors to focus on most when attempting to get your credit score higher, you’ll need to focus on the following areas:
Age Of Accounts
When determining your credit score, agencies investigate your history of payment, i.e., how many delinquent payments you have and for how long, your history of timely payments, and outstanding delinquent payments.
How you use your credit is an important factor in determining your credit score. If your debt to credit ratio is high, that means your power to utilize your available credit is reduced. The more debt you incur in relation to your total available credit, the less income you have freed up to make future payments on additional lines of credit.
The best way to utilize your credit to achieve a high credit score is to use your credit cards regularly but to pay them off every month. That way, creditors see that they can make money off of your line of credit. And they don’t have to worry about you going delinquent since you make timely, complete payments.
Age of Accounts
Generally speaking, the older your lines of credit, the better. If you have older accounts with terms you are no longer happy with, try calling them and renegotiating the terms instead of closing down the accounts. Your active credit history is only as long as your oldest open account. The longer history you can establish, the more credibility you possess.
How much you already have compared to your income and financial position is a big indicator of your ability to acquire and maintain new lines of credit. If you’re already swimming in a sea of debt, your credit rating is likely to go down. The exception to this rule is the lines of credit such as mortgages.
New credit isn’t necessarily a bad thing unless you’ve opened several credit lines in the last six months, and you’re applying for more. When you do open a new line of credit, make sure it’s the right choice for you with the terms you want, then wait at least six months before opening any other lines of credit.
Most lenders will check into your credit without solicitation from you. These are called soft inquiries, and they do not affect your credit rating. However, when you ask an agency to give you a line of credit, they will be conducting a hard inquiry that’s recorded on your credit report. While one here or there isn’t going to do any damage, if you’re asking for hard inquiries too often or too close together, your credit score is likely to go down.
Information is incredibly dynamic these days, financial information in particular. The availability to access information quickly and input new information into existing repositories, lends itself to a fluid data exchange that changes dynamically. However, given the dynamic nature of information, it’s hard to pinpoint when changes to data, such as your credit score, will change.
Credit bureaus information is completely dependent upon a large number of different creditors, all who report data at various intervals and at different times of the month, depending on when they process your credit information. Creditors aren’t even obligated to inform the credit bureaus of these changes if they don’t want to, which is great if you’ve missed a bill or two, but not so great if you’ve been a glowing customer.
Our credit bureaus are operating these days in much the same way, where new available information that comes up is automatically ingested into the credit assessment algorithm and reported to inquiring consumers. Some other types of information that is more routine and systematic, updates on a monthly basis.
Types of information updated on credit reports
For dynamically obtained information like consumer initiated credit line requests, bureaus update credit scores almost instantaneously, or at least daily most of the time. As soon as anyone makes a credit request for a potential borrower, one of the three credit bureaus runs its credit evaluation mechanism, incorporating instantly any new information about a consumer’s finances that’s been reported by one of it’s suppliers. For example, if you apply for a credit card today, you can see that application transaction reflected in your credit report tomorrow.
What’s unique about this situation is that all three of the major credit bureaus, Equifax, Transunion, and Experian do not necessarily communicate with each other. So some updates may make it to one bureau and not the other. Or if one creditor pulls a report from Equifax, another creditor who pulls from one of the other bureaus will not see that the first one pulled a report at all. Other than that hiccup, all data that comes in to any one bureau is updated as it comes in, usually daily.
There are segments of credit information profiles that are reported on a systematic basis, usually monthly. This is most often seen in the areas of credit lines where monthly payments are made. Information regarding missed or delinquent payments will be sent to the bureau at the time the monthly billing cycle came around for that particular individual. Other information reported in a more systematic, scheduled way include changes to personal information such as address and telephone number.
From a consumer’s point of view, knowing this little fact about monthly reporting will help someone who is trying to save time applying for a line of credit, especially for major purchases. If you have just recently paid off large balances on cards in hopes of qualifying for a better auto loan rate, then it’s best to apply for the loan after your credit card billing cycle has ended, and you can be sure the information has been sent and processed by the bureaus.
Public information such as a civic matter, a bankruptcy, or a tax lien placed against you, will show up on your credit anywhere from a week to months after. Once it makes its way on there, it can remain for a very long time, even up to 10 years.
Derogatory information doesn’t stay on your credit report forever, but it does take a while to fall off of the radar. Negative information such as delinquent payments, foreclosures, and bankruptcies all expire on the 7th year anniversary of the original date of delinquency.
Mistakes and Discrepancies
Credit bureaus have 30 days to investigate information you send in to dispute any negative information found in your credit report. If you send in new information in the process, then the length of time the bureau has to complete your investigation is extended. Once this period is over, however, if changes or corrections have been made they will immediately be reflected on your report.
Updates That Don’t Affect Credit Scores
It’s quite routine for existing creditors to pull your credit report for systematic reviews. Also, potential creditors may pull your report to consider whether or not to pre-approve you for an offer you did not solicit. In these and similar instances, no change to your credit score is made, even though your report will reflect the activity initiated by these creditors. Since it wasn’t initiated by you, it cannot hurt you.
The best way to see if the actions you’re taking to improve your credit are working is by purchasing a credit monitoring service that can update you in real time of changes and activity to your credit. This way you aren’t left in the dark wondering if the measures
Your credit score has a huge impact on your ability to fully participate in some major life events, like purchasing a car, getting a personal loan, buying a home, even obtaining a job. Knowing your credit score, and the necessary steps to improve it, will help position you well to obtain the best interest rates when the time comes to get approved for a loan.
Although it may take some time, especially if you’re starting out with a lower than desired number, taking steps to improve your credit is always a worthwhile endeavor. Even if you just want to get from 700 to 800, there are some key things you can do over time to make the climb. Here are 5 important factors to keep in mind for improving your credit score:
Know Your Credit Report
The best way to know what your credit profile looks like is to simply obtain a copy of the credit report. You may be surprised by what you see. You should never assume that your credit report will be one hundred percent accurate. Mistakes and inaccuracies often occur, even with those individuals who have stellar credit. If you find mistakes, you’ll need to start the process to report them and have them corrected.
Besides looking for discrepancies in your credit, you’ll benefit from knowing the specific reasons your credit score is the number it is. Knowing your biggest areas of weakness will tell you exactly where you need to improve. For instance, if you have a high debt-to-credit ratio, then you know the quickest way to start seeing an improvement in your score is by paying off some of that debt.
An easy way to obtain your report is by going to the Annual Credit Report website, an authorized online source, for a free credit report. Under federal law, you can get a free report from each of the three national credit reporting companies every 12 months.
You can also call 877-322-8228 to obtain a copy. Or, you can fill out the Federal Trade Commission’s (FTC) Annual Credit Report Request form at their website. This form can be mailed to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Examine the Timeliness of Your Payments
This factor accounts for approximately 35% of your credit score. That’s huge! Everytime you are delinquent on a credit card payment, it hurts this section of your score. Every time you have been referred to a collection agency, even by mistake, this section is affected. And, if you have ever had a foreclosure or bankruptcy, it will hurt this section of your credit report as well. The biggest favor you can do to your credit score is practicing excellent organizational skills and timely bill pay management. Otherwise, it’s easy to accidentally miss a payment or two, especially if you carry more than a few lines of credit.
Limit Outstanding Debt
30% of your score is determined by the total amount of debt owed, compared to the amount of credit available to you. The best way to keep this ratio low is by having a decent number of credit lines – all with very low balances. Use cards to spend on the things you need, and pay them off monthly. This way your debt-to-credit ratio remains low and you can still rack up rewards points and discounts from using your cards.
Take Measures to Lengthen Your Credit History
Although not as big of a factor as outstanding debt and payment timeliness, credit history still counts for 15% of your overall score. The longer a credit line has been open in your name, the higher your credit score will be. This is where opening new credit might hurt a little bit. If you open new lines of credit often, then your overall credit history length may be shortened.
Closing credit cards may not necessarily be the best idea either. It may shorten your history, depending on the scoring mechanism. FICO scores actually count both open and closed cards when determining your history. Closing accounts also lowers your debt-to-credit ratio, which is not generally a good move when you’re trying to improve your score.
Be Careful When Acquiring New Credit
Before you hit that apply button, think about if it’s something you really want to do. Each new inquiry or application for credit may lower your score up to five points. So before you open a new line of credit, take the time to research the card so that you can be sure this is a card with the lowest rate and the best personal benefits.
For more information on how credit scores are derived, and to learn more about what you can do on an individual basis to improve your own score, take a look at the Federal Trade Commission’s resources. They have a few publications that may be really helpful. One titled “Building A Better Credit Report” contains instructions on how to correct mistakes with your report, and recommendations for avoiding rip offs and scams. Another one called “Credit Repair: Self-Help May Be Best” will help you improve your credit and also provides a list of free or no cost resources to help you repair your credit.
Improving your credit score is a worthwhile process, whether you’re just trying to nudge it up fifty points or 350 points. It may take only a few months or it may take several years. But the better your credit, the more opportunity you’ll enjoy – personally, professionally, and financially.
There is also a certain sense of pride you’ll feel knowing that every lender would love to hand you a line of credit because of your high score. Maintaining excellent credit forces those who aren’t naturally financially organized to be that way anyway. It is a key to financial freedom, and a large deterrent to racking up debt — something that in this day and age is all too easy to do.