Financial Wellness: Let's Talk Credit

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This week’s blog is written by Ben Raines, Wellness Coordinator for Financial Education within the Student Life Student Wellness Center at The Ohio State University. He is responsible for continuous improvement and support of Scarlet & Gray Financial, the nationally recognized peer financial coaching program. 

What is a credit score? 

Your credit score shows up in your life in a number of ways. It influences your interest rates when borrowing for a car or house and a good credit score can save you tens of thousands of dollars over your lifetime. Some employers will check the credit scores of applicants and landlords may also use it to judge the quality of potential tenants. A credit score is an expression of the risk associated with lending money to a person. FICO, the most commonly used score, ranges from 300 at the low end and 850 as the best possible score. Achieving a 750 credit score will qualify most borrowers for the best possible interest rates. 

Credit Cards

Credit cards are a financial tool you can use to improve your credit score and offer many other benefits including fraud protection and credit card rewards. It’s important too, to understand that poor management of a credit card can result in both damage to your credit score and credit card debt. Be sure to only charge what you can pay off in full every month.  

How is a credit score determined? 

Once someone starts borrowing money from a financial institution, be it a student loan or credit card, all of the payment and account information is aggregated into a credit report. Based on the information on this report, a credit score is determined. It is a good practice to check your credit report on a regular basis to ensure there aren’t any errors or other issues. Consumers are able to check all three credit reports once a year for free at AnnualCreditReport.com. The actual formula for determining someone’s credit score is a trade secrete but FICO provides an idea of how the algorithm weights several factors: 

  • Payment history: 35% of your credit score. In short, make your payments on time. In the case of an installment loan, like a student loan, the borrower simply needs to make the entire payment in full but with credit cards just the minimum payment is needed. Keep in mind, that anything less than payment in full will result in interest being charged to the account.  
  • Utilization rate: 30% of your credit score. Utilization rate is the ratio of spending on credit cards to overall credit limit. Under 30% is a good practice though under 10% is ideal. 
  • Length of credit history: 15%. Having a longer credit history is better. It’s not possible to make your credit history longer except by getting older, so starting earlier is better.  
  • New credit: 10%. Each new formal application for an account will appear on your credit report and hurt your credit score for a short period of time. Be sure to open new accounts strategically and avoid it all together prior to a large purchase like mortgage or car loan. 
  • Credit mix: 10%. Having a mix of credit cards and other revolving lines of credit and installment loans, like student loans, is helpful.

How to get started

Those students borrowing for college likely have a credit score already. For everyone else a credit card is an option. Since 2009 first time borrowers need to be at least age 21 to open the first credit card. Secured or student credit cards are a good fit for first time credit card users. 

Scarlet and Gray Financial coaches are extensively trained college students offering personalized financial education to assist other students in meeting their financial goals. Financial coaches can assist students with budgeting, establishing credit, cards, understanding student loans, and investing.  

Students interested in meeting with a peer financial coach can visit go.osu.edu/yourfinances to register.  

“If you don't take good care of your credit, then your credit won't take good care of you.”― Unknown

Category: On the Job