College Connect: Your credit score: what does it mean and why you should care

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UntitledBy Lauren Langille

Your credit score is a number used to determine your riskiness of borrowing money from a lender. The higher the score, the more likely you are to pay back the loan. This means the lender is taking on less risk, so they are willing to lend you money at a lower interest rate. However, a lower number indicates you are a greater risk, so it becomes more expensive and can be difficult to borrow money.

So how exactly is this number determined?

There are three main credit agencies that calculate your FICO* score: Equifax, Experian and TransUnion. Each agency uses the same methods for calculating your credit risk, but not all agencies have exactly the same information. So all three bureaus will calculate similar scores, but not necessarily the same. You score ranges from 300 to 850 – the higher the better.

There are five main pieces of credit data that influence your score: payment history, amounts owed, length of credit history, new credit and types of credit used. Lenders want to know if you have paid past credit accounts, what your outstanding balance is, how long you have had credit accounts and when they were last used. They look at your mix of credit of anything from credit cards to mortgage loans and new credit accounts that you open.

So, what can you do to build a strong credit score?

As a student this can be a challenge. Here is my list of the top three things you can do RIGHT NOW that will have payoffs later down the road. For instance, if you want to purchase a new car once you land your first job, your credit score will determine the rate of interest you pay, and if you are even eligible to be given the loan for a car.

Open a credit card ASAP

The earlier you open up a credit card, the longer credit history you will have. This requires proof of income. If you are unable to open your own card, talk to your parents about becoming an authorized user on their account. They are ultimately liable for the responsibility of repaying debts, but this can give you a start at building up credit history. Only choose this option if your parents have a strong FICO score.

If your parents aren’t too enthused about that idea, you can get a secured credit card on your own. This is what I had to do when I moved to the U.S. two years ago. Even though I was 22 and had been regularly using two credit cards since I was 18, my credit history did not transfer over to a new country, so I had to start all over again. To get a secured credit card, you give the bank a few hundred dollars as collateral (typically $300 to $500), and then they issue you a card with a secured line of credit for the same amount you put down.

Once you have proved you can make payments on time, your bank will let you open an unsecured card, which is a regular credit card. Your initial payment used as collateral for the secured card will be given back. One thing to make sure with secured credit cards is that your activity is reported to one of the three main rating agencies.

Use your credit card and make sure to pay on time

Once you have a credit card, make sure you use it. Just because you have a credit card doesn’t mean you automatically get a good score. Use it for small purchases, and then pay it off. If you make payments on time, you will not be charged interest and this will positively affect your score. If you are late, or miss payments this will have the opposite effect. Plus you will have to pay somewhere around 20% of interest for the outstanding charges.

Don’t open multiple accounts at the same time, even if they save you an extra 15% on your purchase

Having too many credit cards, especially if you opened them around the same time will hurt your score – even if you use them all responsibly. Once you open your first credit card, you will probably get bombarded from other companies trying to offer you credit. Limit yourself to one or two credit cards, and leave the rest. Don’t get caught up in saving an extra 15 or 20% on your purchase if you open a card. It will only hurt you in the long run.

Bottom line: Start building your credit history now, because it will help you at lot down the road.


*FICO: Fair Isaac and Company, an analytical software company who developed the mathematical equation to calculate consumer credit risk



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What’s in my FICO score? Accessed November 22, 2014.


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