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The Important Financial Lesson You Won’t Learn in College

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As a college student, it may not be important to know what a credit score is, right? Wrong. Even though you are likely new to the credit history world, it doesn’t mean you shouldn’t have an idea on how it works.

Here we’ll help you understand what credit scores are and why they’re important.

What Are Credit Scores?

Credit scores are a three-digit number established by your detailed credit history listed on your credit report. They are used to help you obtain many financial opportunities. These scores are very valuable; how high or low your credit scores are can effect whether you can obtain a loan or not. For example, if you have poor credit and you are looking to get a car loan, you may get rejected. If you don’t get rejected, you may receive a loan with a relatively high interest rate. If you have average to high credit, you will likely be approved for the loan, possibly with a lower interest rate.

What is a Good Credit Score?

It’s important to note that there are many different credit scoring models, but there are typically four different types of score ratings: poor, fair, good and excellent. To get the best interest rates, you typically want to try your best to stay in the “good” or “excellent” categories, if you can. However, at an early age, you may start out in the fair rating, which is OK. Do your best to never let your score become a “poor” rating. Each lender has its own standards on what makes a credit score bad or good. However, here are some general guidelines: Poor credit is a credit score that is 300 – 629, fair credit is 630 – 689, good credit is 690 – 719 and excellent credit is 720 and up.

What Impacts Your Credit Score?

There are several categories that make up credit scores, which you can see in detail on your credit reports. Your credit scores are derived from your payment history, debt usage, length of credit history, types of credit used and number of new credit inquiries. Some factors weigh more heavily than others, with payment history and debt owed making up the majority of most credit scores (typically accounting for around 65%).

If your credit isn’t quite where you want it to be, consider how each element could be affecting you. For example, if you notice that you are making all of your payments on time, but your score is still a “good” rating, this could mean that you haven’t had your accounts open for a long period of time and that’s bringing down your score. (The length of your credit history makes up about 10% of your overall credit scores.) It’s also important to avoid missing payments, as this can negatively impact your score as well.

Keep in mind, demographic information (age, race, address) don’t affect your score.

How to Check Your Credit 

You can see two of your credit scores for free, updated each month, on Credit.com and you are entitled to a free copy of your credit report every 12 months from the three main credit reporting agencies  (Equifax, Experian and TransUnion), which you can get by visiting AnnualCreditReport.com.

Why it’s Important to Know More Than Your Credit Score

Your credit scores are very valuable, however it is important to also be able to understand your credit report and credit statements. If you simply just check your credit scores, you may not understand what to do when they’re at a low rating. It’s a good idea to review your monthly credit card statements for problems that can affect your credit and to obtain a copy of your credit reports at least once a year. That way, you will always be in the know and can do the work to help you get to be in good standing.

Image: Christopher Futcher

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