Credit Scores

Your creditworthiness is represented numerically by your credit score, which is determined by your credit history. A credit score is a three-digit number between 300 and 850 that is used to inform others of how likely you are to pay your debts (and on time!).

Overall, your credit score is an indicator of your ability to repay debt. Even if you don’t think you’ll need credit any time soon, Future You will be grateful for their lower interest rates and credit options because present you started building credit early (and responsibly!).

View the video below for a quick overview of credit scores by the Student Federal Credit Union at Penn

How to Build Credit

Although it seems counterintuitive, before you have a credit score, you’ll need to establish your ability to manage credit responsibly. You need credit to get credit. This can make it challenging to start building credit, but there are some options for you to build credit from scratch.

With a secured credit card, you provide an amount of money to the lender that serves as your credit limit. The lender will hold onto your cash and allow you to continuously borrow your money from them and pay it back. With this method, you’re able to demonstrate your ability to manage credit responsibly, and the lender is free from the potential risk that you may not pay your debts.

Credit card companies are aware of this “needing credit to get credit” dilemma. For that reason, many companies have created credit card programs specifically for students. NerdWallet offers reviews to help you find the student credit card that is best for you.

Credit builder programs give you a small loan that is immediately placed into a savings account or certificate of deposit (CD). For the term of the loan, the borrowed money remains in the savings account and you are responsible for making monthly payments, including interest, to pay off the loan. Your payments toward the loan are reported to the three credit bureaus to demonstrate your responsible debt habits. At the end of the term, you receive the money in the savings account and you should have a great record of on-time debt payments. These programs are offered by many major banks and credit unions, including Penn’s Student Federal Credit Union.

Determining a Credit Score

There are two credit-scoring models: FICO and VantageScore. If you’re interested in learning about their differences, you can read more on Credit Karma. However, you don’t need to worry too much about the differences between the two—both models use the same scale and use similar criteria to determine your score. The following can affect your credit score.

Payment History

This takes into consideration your history of late payments, amount of payments, and amount of missed payments.

Credit Utilization

Keep track of your ratio of used credit to credit available. Generally, you want to keep your credit usage around 25-30%. For instance, if you have a credit line of $1,000, you should try to use no more than $300 of it at any given time.

Length of Credit History

The average age of your accounts is factored into your credit score. Avoid opening new accounts frequently to allow your existing accounts to age, and don’t close a lasting credit line unless you absolutely have to.

Types of Credit

Having a mix of credit accounts will impact your credit score. This mix may include credit cards, student loans, and/or a mortgage.

Hard Credit Inquiries

When you apply for a new loan or credit card, the lender will review your credit history. This can have a negative impact on your credit score. Soft inquiries do not hurt your credit score, though. When you request to see your own credit score, it is considered a soft inquiry, thus it does not hurt your credit score.

Credit Reports

Your credit report provides a detailed account of your creditworthiness. If you have a history of missed or late payments, a credit card issuer has good reason to doubt your trustworthiness.

A credit report includes personal information including your social security number, current and past addresses and employers, creditors you’ve done business with, payment history, account statuses, repossessions, inquiries into your credit score, and more.

It’s good practice to regularly review your credit report. Under US federal law, you are entitled to one free credit report every year (instructions here) from each of the three major credit bureaus: TransUnion, Equifax, and Experian. Request your report annually, and make sure it is accurate. If anything is incorrect, you can dispute the errors.

Improve Your Credit Score

Is your credit score less than desirable? Follow these steps to maintain a good credit score or to improve your current score.

The first step in building or raising your credit score is to know your starting point. For tracking improvement, pick either your FICO or VantageScore and stick with it. You can access your VantageScore weekly through Nerd Wallet here

Adhering to a payment schedule and demonstrating timeliness are important to credit score. This means any outstanding loans or card balances should be paid back on time. It’s okay to pay the minimum payment, but paying more will cost you less in the long run.

Someone with a long history of paying bills would have a higher score than someone who has never taken out a loan or used a credit card, all else equal. If you are new to credit cards and loans, consider opening a credit card with a $0 annual fee and no punishment for not using it – you’ll want to keep your first credit card open as long as possible to increase your credit age.

Use 25-30% of your total credit limit to help your score. This can be accomplished by paying down your credit card balance weekly, or even after every purchase. If you are responsible with your spending, asking to increase your credit limit on your current credit card (so that you are spending a smaller percentage of this limit) can have positive effects on your credit score.

Errors could be lowering your score. Review your report and if there are errors, dispute them to get them removed.

Having more accounts open usually equates to a higher credit score, provided that these accounts are in good standing. One option is to become an authorized user on a relative or friend’s credit card account, provided they use this card responsibly. The account holder doesn’t have to give you access to use the card but having your name on the account can boost your score. Only consider this option if you trust the account holder to make responsible financial decisions and you have limited other options.

This refers to having both types of credit: installment debt (loans) and revolving credit (credit card). As long as you are paying all bills on time, having both types of credit can boost your score.

Do not make charges on a credit card that you cannot repay.