The word ‘credit’ can often come off as some scary and intimidating concept that’s best left for other people to figure out. While sometimes that might be the case, credit can actually be your friend.
For starters, let’s define credit. Credit is when you have the ability to borrow money now with the expectation that you’ll pay it off later. The amount that you use on credit is called the principal which is paid back over time in payments called installments. There’s also a minimum payment feature which is the least amount that can be paid on a credit balance at the end of the billing cycle.
Credit also has something that might contribute to the scary part: interest. If you don’t pay off the full balance of your credit statement by the end of the grace period (typically 21-25 days) interest will begin accruing on top of the balance. Another term used for interest is annual percentage rate (APR). APR can vary depending on numerous factors like credit score, type of credit card, and the bank/company issuing the card. But you can avoid having to pay the interest rate if you make your full payment before the end of the grace period.
Credit Scores
Before we go more into properly using credit, we should figure out what a credit score is and what the different numbers all mean.
A credit score is a number ranging from 300-850 based on numerous factors and indicates your ability to borrow money. It also shows lenders how reliable of a borrower you are. The most commonly used credit score is the FICO score, however there’s also Vantage score. The range of scores are as follows:
- 300 – 579 → Very poor credit score
- 580 – 669 → Fair credit score
- 670 – 739 → Good credit score
- 740 – 799 → Very good credit score
- 800 – 850 → Exceptional credit score
The factors that make up these scores include: payment history—which makes up how consistent you are with paying back your credit; how much you owe; the length of your credit history; the mix of credit you have—which could be different types of credit accounts; and new credit and inquiries—which includes how often you apply for new lines of credit and should be limited to about 1-2. A common myth is that checking your credit score negatively impacts your credit. I’m here to tell you that’s not true and technically you can check it as many times as you want. Once a year you can request a free credit report (where you can see your full credit history in reference to your score) on www.annualcreditreport.com.
Importance of Credit
Credit can be very useful in one’s life when it’s used correctly. When you have good credit, you can begin to take out loans with better terms and lower interest rates on important areas of your life, like education, a house/apartment, a car, etc.
By having an established credit score, banks will loan you what you need to purchase these items, which you will then pay back and establish even more credit. It’s almost like a never-ending cycle.
It can also be used in events like an emergency where if something unexpected happens, you have a sort of security blanket.
Having good credit will also prove that you’re less of a risk and will therefore encourage a lower interest rate. However, always remember that there are risks involved with credit and not being able to make those payments. Make sure to limit borrowing as much as possible and only take out what you know you will be able to pay back.
How to Build Credit
I know it might seem like an intimidating subject, but it doesn’t have to be. You can start small by building credit slowly so that it doesn’t hit you out of nowhere when you need it most.
There are numerous ways you can start building credit in college. First, you might want to check your credit report even if you think you don’t have one. If you’ve taken out student loans, you probably do. If you’re starting from square one, you can apply for a secured credit card which is reinforced by an upfront cash deposit and acts like a credit limit. You can use this Credit Card Comparison Tool to help figure out what best fits your needs. You can also borrow credit with someone who already has an established credit score, called a co-signer. This method allows you to begin building your own history with a reliable source. Or you can become an authorized user on a credit card which means your name is associated with someone else’s card. There are also options that include having your rent and utilities payments reported to credit bureaus and paying off your student loans. Once you have your channel of credit, make sure you’re making on-time payments and paying at least the minimum (but aim for the full amount). Don’t overuse it—try aiming to put less than 30% of purchases on credit. Just keep in mind that it’s a learning process and will be a slow start that ends up very worth it over time.
If you’re still unsure where to start or if you want more information on credit as a whole, there’s a Syracuse Smart Money Coach happy to help. Feel free to make an appointment on Orange Success or email the Office of Financial Literacy at finlit@syr.edu.
Written by Stella Miller ’21, Whitman School of Management, Smart Money Coach