Closely related to debt and loans is your credit score or credit rating. Let’s look at what a credit rating is and what you can do to influence it…
“If you don’t take good care of your credit, then your credit won’t take good care of you.”
There is an entire industry built around evaluating people’s creditworthiness, which is summarized in a “credit score”. You thought you were done being graded after you get out of school, but it never ends!
A credit score is sort of a prediction of how likely you are to pay a loan back on time. It is based on a number of factors but the most important ones are your payment history on prior loans, on credit cards, on bills, and also how much debt you currently have or could potentially have (say on additional credit cards).
The score is an important factor used in determining if you can get a specific loan, and also what the terms will be, the most important of which is the interest rate.
The credit score ranges from 350-800. The higher your score, the lower the interest rate you’ll have to pay on a loan. This can end up saving you tens of thousands of dollars over the life of a loan.
Building your credit score
There are a number of things you can do to maintain a good credit history: - pay your bills on time every month - don’t use more than 30% of your credit limit. Even better, just pay your credit cards off completely each month. - use the same credit cards for many years (don’t cancel and get new ones over and over) - only have a couple of cards active at once - too many hurts your score - finally, make sure there aren’t any errors on your current credit report - you can get a copy of the report free each year from each of the credit agencies. Since all of you are young and just starting out, there will probably be very little information on your credit report but it would still be instructive to look at it.