Credit 101

What is a credit report and credit score?

A credit report and a credit score are two important pieces of information regarding your financial history. A credit report shows your actual financial history whether that’s current debt (like student loans), bill payment history, and other financial information like where you receive your income (job or self-employed). A credit score is a calculated number that represents your financial history. Creditors, insurers, and employers can look at your credit score and report to determine how much of a financial risk you are to their business.(2) If that information went in one ear and went out the other, just think of these two concepts as a financial report card (school), with your credit score being the actual letter grades and the credit report as your assignments, projects, and exams that led to the final grade. 🙂

How is it calculated?

Information necessary to develop both a credit score and a credit report are gathered by Credit Reporting Agencies (CRA). The three main credit reporting agencies that consumers use are Experian, Equifax, and Transunion. These three agencies are all separate entities and there may be some differences in terms of the financial information they have gathered on you. In terms of reporting though, no agency is regarded as a “higher” quality over the others.(1) Once the information is gathered, your credit score is based on your payment history, current debt, length of credit history, and new credit (Ex: Applying for a credit card). Your credit score can range anywhere from 300-850. An average credit score would be around 650, while anything below that would be considered below average and anything above being good (in the 700’s). An excellent score usually falls in the range of 750-850.(2)

How do I improve it ?

It is important to note that for young adults, usually we don’t have a lot of financial history because of the lack of financial responsibility. Regardless of your financial responsibility in the past, here are four ways you can improve your credit score.

1. Paying your bills on time

Paying your bills on time like rent for an apartment or a phone bill can seem like a “no brainer” but this can have a major impact on your credit score with payment history making up a significant portion of the information used for credit score calculation.

2. Credit card

A credit card is another method of showing that you can take on financial responsibility by paying your credit card bill on time. For young adults, you may currently have a credit card from your parents or you may have gotten one on your own. It is important to get a credit card in your own name if you choose to get a credit card so that it is attached to your financial history. You should look for starter credit cards that will allow you to apply with little financial history because young adults usually have none. 

3. Pay your student loans on time

Student loans are becoming more common for college students and with current debt being a factor in your credit score, it is important to understand who your loans are from and how you will go about paying these loans back. Understanding your student loans and aggressively paying them back on time can positively impact credit score and probably your mental health. 

4. Credit freeze

A credit freeze is not really an option to improve your credit score but rather an option to protect yourself from credit fraud. A credit freeze allows you to stop businesses from being able to access your credit report and this can prevent people from opening new lines of credit like a credit card for example.

Credit reports and credit scores can benefit you if your financial history is strong or hurt you if it is weak. It is important to monitor your credit score and report to stay aware of your financial history. Overall, young adults usually have a short or non-existing financial history, but having this knowledge and applying it over time will be beneficial for your financial well-being.

Disclaimer: Thegrownwave.com is a personal finance blog, not a professional investment advisor. The content produced from the blog is provided for free and only for informational purposes. Thegrownwave.com does not and cannot promise the accuracy and reliability of any content in comparison to your individual circumstances.

Sources

1. Issa, Natalie. “How to Start Building Credit Once You Turn 18.” Credit.com, 27 Oct. 2020, http://www.credit.com/blog/how-to-start-building-credit-once-you-turn-18-139817/. 
2. United States Federal Government. “Credit Reports and Scores.” USAGov, http://www.usa.gov/credit-reports.
3. “What Is New Credit?” MyFICO, http://www.myfico.com/credit-education/credit-scores/new-credit.