Understanding Credit

Most students start building their credit history during college. School loans, car loans, and credit cards are the most common paths to begin your credit history. Your goal is to establish a good credit history. Your performance in paying back loans and other bills in your name will determine your credit history. A credit report details your credit history, including employment history, personal information, and a list of open and closed credit accounts. A credit score is based on your credit history: it is a snapshot of your credit risk that is generated for lenders when you request a line of credit, like a personal loan or a credit card. Your credit score condenses your payment history, amount of debt, length of credit history, new credit, and mix of credit types into a number that indicates your creditworthiness (how likely you are to repay your debt). In short, a stellar credit score will make it possible for you to finance a car or buy a home with the most favorable terms.

How to Build Credit

The easiest way to start building your credit history is to borrow a student loan and/or apply for a credit card. Federal student loans offer low-interest rates relative to other loans and many options to repay them. Student loans are installment loans which when properly managed and repaid can help build credit history and your credit score. If you decide to get a credit card, use it wisely and in accordance with your budget. While credit cards make it possible to spend money you have not yet earned, your goal is to be able to pay off your credit card in full every month to eliminate the possibility of paying any interest.

Creditworthiness Tips

  • Make student loan and credit card payments on time. 35% of your credit score comes from your history of paying bills on time. (To learn more about credit scores visit Equifax's FICO score page.)

  • Use your credit sparingly, staying well within the credit limit of the account. Financial experts recommend using only 30% of an account's available credit, if possible.

  • When using credit cards, only charge what you can afford to pay off in one month. Period!

  • Pay off your credit card balances instead of moving debt to other credit cards. Remember: having lots of open credit card accounts can negatively impact your credit score.

  • Review your credit report annually to ensure accuracy and check for fraud. You can get a free copy of your credit report once a year from each of the three major credit bureaus (Experian, Equifax, and TransUnion). If you find that you are a victim of identity fraud, use this identity fraud checklist to help navigate your next steps.