Reputation is everything, right?
Also true when it comes to credit. Establishing and building credit at an early age helps put you in good standing for when you are ready to apply for an auto loan, or even when being considered for an apartment.
When should I establish credit?
For most people, their first introduction to credit is through a credit card. Getting a credit card in college, or even before, is an opportunity to establish positive credit history that is used to determine your FICO score. A FICO score is a particular brand of credit score used to predict how likely you are to pay back a loan on time. Ranging from a low score of 300 up to a high score of 850, think of it as your financial report card. A higher credit score means you’ll receive a lower interest rate and pay less interest overall on a future loan.
What determines a FICO score?
Here is the breakdown:
- Payment history = 35 percent
- Amount of debt = 30 percent
- Length of credit history = 15 percent
- New credit = 10 percent
- Credit mix = 10 percent
Since boosting your credit score takes time, it’s crucial to get an early start.
How does credit work?
Unlike a debit card, which immediately takes money out of your savings or checking account each time you swipe it, using a credit card is similar to taking out a loan – you are borrowing money to pay for something you want or need, and you are responsible for paying that money back. Here’s an example: You purchase several items for a total of $280 using a credit card to pay for them. You then receive a statement for your credit card telling you the total amount due, the minimum payment due and when the payment is due. Now, you can do one of two things: You can pay the full amount due on or before the due date, or you can pay the minimum amount due on or before the due date.
If you pay the total amount due on or before the due date, you will avoid paying interest. However, if you only pay the minimum amount due, say $35, then on the statement you receive the next month, the total amount due will show the remaining amount due plus interest.
Here’s the catch: If you continue to pay only the minimum payment each month and the credit card has an interest rate of say 8.9 percent, it will take nine months to pay off the original $280 plus the interest accrued.
In this case, that would be $35, making your total payment $315.
The key point is that making more than the minimum payment or, better yet, paying off the entire balance is important because it saves you money in the long run. It is also important to pay at least the minimum amount due because it positively affects your credit score and will show in your credit history that you use credit responsibly.
Where do I go if I need help?
If all this seems overwhelming, never fear. Many resources exist to help you navigate the world of credit and credit scores. One resource is closer than you think! Michigan State University Federal Credit Union offers free financial education classes on campus throughout the school year. Find out more information by visiting financial40.org. There is also a Financial 4.0 mobile app for IOS and Android enabled devices.
When it comes down to it, the best thing you can do for your credit is to be responsible. By understanding what impacts your credit score, you will have the tools needed to set yourself up for a successful financial future.