Class rank and GPA’s were once the ticket to graduation and a successful career. But times have changed! Your credit image is now an important key to your future. You may be a student in your 20′s or someone with significant life experience who has returned to school. Either way, you are never too young or too old to establish a strong credit image. In the past, credit was extended based on personal knowledge of you and your reputation. Not anymore! Today, your personal reputation has been replaced by a credit report/score.Your credit image is a snapshot (like a photograph) of your credit worthiness at a fixed moment in time. This credit image is how you look to others who are making decisions about you. It determines what interest rates you are offered, and affects many other decisions made by credit card companies, lenders, landlords, employers, insurance brokers, utility and cell phone companies. Your credit image can also impact private student loans. Establishing and building credit in today’s current economy isn’t easy and can be very confusing without understanding where to begin.How Credit Scores WorkThe most important contribution to your credit image is your credit score. Understanding what makes up the score will give you an edge on how to manage your credit image and make good credit decisions along the way.To date, the most widely used credit score is a FICO score (designed by Fair Isaac Corporation). This score ranges from 300-850, broken down as follows:35% – Payment History: Making payments on time is the most critical part of building a credit score. Delinquent payments can stay on your credit report up to seven years. They can cost you higher interest rates, over-the-limit charges and late payment penalties – not a good use of your money.30% – Amounts Owed: When possible, keep balances to 30% or less of available credit. This is called your balance to limit ratio. You may spend more, but always keep your balance carried each month under 30% of your credit limit. Make more than the minimum payment to help build a strong score and credit image.
15% – Length of Credit History: Considers how long you have had loans or credit cards. This may be one of your weakest areas if you have just started establishing or re-establishing your credit.10% – New Credit: A reasonable amount of new accounts established over time will help increase your score. However, too many new accounts in a short season of time can raise concern. For example, you’ll want to seriously consider whether applying for three new department store cards will serve your longer term goals. Too many “hard inquiries” required to grant credit can lower your score for up to two years.10% – Types of Credit Used: Diversity of account types shows lenders and others viewing your credit image that you can manage different types of credit. The scoring model looks for credit cards, revolving credit such as department store cards, installment credit such as auto loans, and mortgages.Where to BeginFirst, pull your free credit reports. When you see “free” credit scores, beware there is a catch. Many times they request your credit card or banking information for the “free” trial or to take their surveys which could be profiling you for other services. You normally pay a fee to retrieve a credit score, although individual credit reports are free. Go to annualcreditreport.com and request all three credit reports – one from each of the major credit reporting agencies: Experian, Equifax and TransUnion. In California, credit reports are offered free of charge once annually. (Some states offer free credit reports more often than once a year).You may have never applied for credit before; yet, if you have held a job you will have a credit report even if it only shows your personal information (name, birth date, social security number, current address and employer). It’s possible there are reported inaccuracies. Scarier yet, someone may have used (or attempt to use) your personal information and identity for their personal credit use. Review all three reports very carefully. Immediately address all inconsistencies or inaccuracies with the credit reporting agency, disputing all incorrect information.What NextGoals and Objectives: Determine your goals and objectives. Do you need to establish credit or possibly re-establish it (short-term goal)? Are you considering a major financial purchase like a house or car, or landing your dream job after graduation (long-term goal)?Banking: Open a checking and savings account with a banking institution. When deciding on a bank you may want to seriously consider a credit union. They typically offer lower interest rates on credit cards, car loans and mortgage loans when you are ready to establish credit lines.Installment Payments: A good way to help you build credit payment history is making timely installment payments like a car loan. At first you may not qualify on your own to finance a car; yet, if a parent is purchasing a new or used car for you, discuss the possibility of placing your name on the auto loan as a co-signer. That way you will both get credit for making payments on the loan.Credit Cards: After establishing a banking relationship for six months or more, consider applying for a bank credit card. If you don’t qualify for your own credit card, a parent or someone who has good credit might consider adding you as an authorized or joint user to their existing credit card. An authorized user doesn’t always have the history from a credit line reported to their credit reports but a joint user (who assumes joint liability for the debt) does. A secured credit card is another alternative. Normally these types of cards have different requirements such as a deposit of $300 to $500. Before applying for a secured card, check the fees to see if they are fair and reasonable. Do they report your credit card activity to the credit reporting agencies? After a year or two will they allow you to convert to a regular credit card? Will you receive your deposit back?Beware of the credit card companies that target students at universities. Be wise – read the fine print and ask yourself first, why you are applying or accepting the credit card being solicited. Do not be swayed by the free item they are giving away if the terms and conditions are not reasonable. Once you have been accepted, be mindful to live within your means. It can be very tempting to spend now and pay later but “later” can be a very long time, impacting your life for many years.Other Things to ConsiderEstablishing your credit image is not just a one time effort. Continued vigilance and maintenance pays off. In this competitive economy, be aware of other areas of concern that may impact your credit image.Digital Dirt: There is a rise in employers who “Google” prospective job candidates. They are possibly using this as an inexpensive way to do a background search on you. This type of search is not covered under the Fair Credit Reporting Act (FCRA). This law only protects you if an employer uses a third-party screening company to conduct a background search. The prospective employer may search to find if you are connected to any social networks like Facebook, MySpace, Twitter, and/or have your own website or blog. Be careful what you publish on the internet and mindful of the impression it creates. Once in cyberspace, information can exist forever and go before you and your next job interview.Student Loans: As you wind down your education, keep these things in mind that will affect your credit score. Six months after graduation (or you are no longer in school full time) your loans become due. Unless you are in a position to pay the monthly payment, know how the terms of your loan work. You may want to consider deferring the loans for a short period of time by continuing your education past the date of graduation or applying for some other type of deferment long enough to get your living expenses and wages in order. Remember that 30% of your credit score is based on your balance to limit ratios and this includes student loans being reported to the credit bureaus. By making regular, timely payments, your loans will continue to build your credit image.Employment: More and more employers are using credit checks as part of their employee screening process. “People are being turned down for jobs on the basis of things that really have nothing to do with qualifications.”* While we are concerned about the inappropriate use of credit reports and scores, this is a growing reality that students must take into consideration when planning a job search.ConclusionOnce you have established your credit image, regular maintenance is critical. Review your credit reports at a minimum yearly, pay your bills on time, monitor your student loans and use credit wisely. A strong credit image will go before you to pave the way for your future success.*New York Times, August 7, 2009 http://www.nytimes.com/2009/08/07/business/07credit.html
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