Good credit can enable you to buy a car or house; bad credit can prevent you from getting a job or renting an apartment. If you've never heard of "FICO" or checked your "bureau report," this column will help you understand what you can do so that credit is on your side. It will help you to answer a few very important questions: What is credit and why does it matter? What do University students need to do to ensure that they have good credit that will serve them well in life?
As credit cards are part of any discussion of credit, I should first disclose that I spent five years after graduation working for a major credit card company, Capital One , before returning to Charlottesville. I certainly learned a great deal that would have been nice to know the first time I was a Hoo.
Why Your Credit Matters
Credit enables people to buy things without paying for them up front. This can be convenient and incredibly useful. On a small scale, when a friend spots you a dollar to buy a soda from the vending machines, they are extending you credit. On a larger scale, most Americans would be unable to purchase homes without credit, as very few people have hundreds of thousands of dollars in spare cash. Similarly, credit in the form of student loans enables many to attend college.
Credit involves the ability to borrow money. If you lack good credit you may be unable to borrow money, or it can cost you more to do so. If you have good credit, when you try to buy a car, house or other credit-based purchase then you may be amazed at how many banks are willing to loan you money and the amount that they are willing to let you borrow. I certainly was. Two years after graduation I was shopping for a townhouse in Northern Virginia and multiple banks were offering to lend me more money than I had ever earned in my entire life!
On a smaller scale, if you have no credit history you may have a greater hassle getting a cell phone plan or even utilities. My cousin moved to the U.S. after school with no credit history. When he needed to get a cell phone for his job he had to put down a cash deposit and go into the cell phone store each month to prepay the bill or they would cut off his service. A friend of mine who moved off Grounds her fourth year had a harder time getting internet service set up because of her lack of a credit history.
How people use credit also indicates their responsibility and trustworthiness. Employers regularly check the credit of job applicants and you can lose a job offer for having bad credit. Many landlords will check your credit when you apply for an apartment. Companies tend not to want employees with a documented history of irresponsible behavior or dishonesty. Likewise, landlords prefer tenants with a documented history of responsible behavior and paying debts and bills on time.
Your credit will even affect how much you have to pay for insurance. Companies have found that people who use credit responsibly tend to behave more responsibly. Since you're less likely to be in a car accident or have an accidental fire, you pay less for insurance.
Credit Scores & Bureaus
Your credit score is simply a number that is used to measure your creditworthiness. "FICO score" is often used interchangeably (because FICO is the company with the most widely used score). These scores range between 300 and 850 with a higher score being better. A score above 720 is typically considered pretty good; below 660 is not so good. As lenders are tightening credit standards during the current recession, you may need a score as high as 780 to get the most favorable (i.e. least costly) loan terms.
Credit bureaus are companies that collect credit-related records on individuals. They gather information like how much money you have borrowed, whether you pay it back as promised, whether you make payments on time and whether there are legal judgments against you. The three major U.S. credit bureaus are Equifax, Experian and TransUnion.
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