Credit 101 Crash Course

GTE UniversityDo you want to buy a car but don’t have the cash? Didn’t save enough this summer to buy those text books?

Using credit rather than cash can help because most people don’t have the cash to cough up for big ticket items.

But it’s important to realize credit isn’t just a card you swipe to buy stuff. It’s a HUGE part of every person’s life and it’s important to know as much as you can about it to make sure it’s your best friend in your time of need.

So what is credit anyway?

The dictionary defines credit as an agreement between a lender (like a bank or institution) and a borrower (like you, a person or company) in which the borrower gets something of value now (like a car, or a cash loan) with the promise of repaying the lender back later. Pretty simple right?

Wrong.

Why? Because not everyone is given credit by lenders. Have you ever heard your friends or family members say they were “not approved”? It’s pretty upsetting to hear those words, but you can make sure that doesn’t happen to you! Here’s how:

When you, the borrower, apply for credit, the lender has to decide if you are a good candidate for receiving a loan or line of credit. Lenders look at your credit history to determine the level of risk involved to choose whether to grant you credit.

That’s right— your credit history determines if you’re getting the money to buy a new car. So you want to make sure your credit history is as flawless as possible.

There’s actually a report that compiles all of your credit history! It’s called a credit report.

Your credit report portrays a financial image of you and assigns a grade using a credit score, ranging from 300-850. The three largest credit reporting agencies are TransUnion, Experian and Equifax, and they’re cool enough to give you an absolutely free credit report every year! Just go to: www.annualcreditreport.com (and don’t confuse that with any of the other websites out there that charge you!)

Your credit report will show you all the information that makes up your credit score but ironically, it won’t show your actual credit score.

A credit score is made up of:

Piechart

  • 30% = debt – how much money have you already borrowed?
  • 35% = payment history—do you always pay back the money you borrow?
  • 10% = new credit—how many times have you applied for new credit this year? If you apply for credit too often, that sends a warning signal to lenders.
  • 15% = length of credit—do you borrow for short periods of time or long periods of time? Entering and maintaining long-term borrowing relationships helps show you are financially responsible.
  • 10% = types of credit—do you balance credit cards (they’re called revolving credit) and loans (they’re called installment credit), or do you only borrow one type?

College students might find it difficult to get credit because we generally have no credit history. It’s a dilemma for us. Establishing credit is pretty simple though once you’re given the opportunity!

  • Open a savings and checking account, and manage them properly.
  • Open your own prepaid credit card or a secured credit card. They allow you to have a credit limit for the amount of money you deposit into the account which is linked to your card.
  • Try to become an authorized user on your parents’ lines of credit or have them co-sign a loan for you.

So to summarize, unless you have the cash now, you’ll need credit. To obtain credit, you’ll need to make sure you establish and maintain an excellent credit history. You can check-up on your credit history every year by pulling your free credit report at annualcreditreport.com.

And last, now that you’re on your way to a successful credit relationship, remember some tricks to make sure you have a good credit score and a great credit history:

  1. Pay on time, every time
  2. Don’t pay down, pay off
  3. Keep your credit limit under 25% of the maximum allowed
  4. Check your credit!