Credit Score: What is it? Why Should I Start Building it Now?

By William Aventuro | December 1, 2022

You have probably heard the term “credit score” before whether it has been in a conversation or even watching TV. What is a credit score? What is the importance of building credit? Knowing the answers to these questions during a person’s college years can not only prepare them for a life of financial responsibility but can make their transition to adulthood much easier altogether.

A credit score is a number ranging from 300-850 which is assigned to a consumer assessing their credit worthiness. The higher an individual's credit score the greater chance they have of securing a loan from a public or private lender. Credit scores are based upon a person’s credit history which consists of the number of accounts that are open under their name, total levels of debt, payment history, and a number of other factors which are part of their financial portfolio. In the United States, there are three major credit bureaus (Equifax, Experian, TransUnion) that analyze, collect, and distribute information regarding a consumer in the credit market.

Credit scores play a key role in a financial lender's decision of offering a person credit; the higher the score the more likely you are to receive this credit. Most creditors have organized scores into five main categories: Excellent (800-850), Very Good (740-799), Good (670-739), Fair (580-669), and Poor (300-579). Furthermore, an individual’s credit score may also have an impact on the size of an initial deposit when purchasing utilities, phones, cars, cable services, and apartments or houses. High credit scores can give a person lower interest rates meaning they will ultimately pay less money for any line of credit they take out. Ultimately it is up to the borrower to do everything in their power to make sure that their credit remains strong so that they can access more borrowing opportunities over the course of their life.

Credit scores can vary depending on which nationwide consumer reporting agency is providing the data for an individual. There are a number of strategies people can use to build their credit scores. After reviewing credit reports it is important to pay off all past debts on time and in full as soon as possible. Once this is done it is important for a person to keep their credit utilization low (at or below 30%); this can be done by asking their credit card company for a credit limit increase. Another method for improving credit is by limiting the number of new lines of credit as this will usually lead to a hard inquiry which can often negatively affect a person’s credit score. Perhaps the most effective and last method for improving a person's credit score is to keep old accounts open. More specifically, when trying to improve their credit score a person should avoid closing any old accounts that have been paid off, even though they may no longer use them; keeping these accounts open will help maintain the length of their credit history which is attractive for credit card companies.

The amount of time it takes to see distinct changes in a person’s credit score varies depending on the individual’s circumstances, but it will most likely require a bit of patience and will not occur immediately. Although this is the case, improving credit score takes both effort and patience and will not occur overnight. For college students perhaps the most important action they can take right now is to open a line of credit (open a credit card or take out a loan) if they don’t already have one established in order to begin their credit history. Not only will they be able to become an authorized user on a credit card through doing this, they will have a longer credit history once they graduate college which will benefit their financial situation in the long run.

Edited by Thomas Anglim