We continue our saving tons of money series this week. Now we shift our attention towards your credit score. Do you know how much money that you can save with a high credit score? Do you realize how important your credit score is? I certainly didn’t know how crucial a credit score is until I saw the breakdown of one and how it affects interest rates on loans when I applied for a home mortgage.

Let’s recap what your credit score is made up of:

• Payment History – 35%
• Total Amounts Owed – 30%
• Length of Credit History – 15%
• New Credit – 10%
• Type of Credit in Use – 10%

Now that we see what makes up a credit score, how can you save tons of money by taking care of your credit score?

Lower interest rates.

The higher your credit score, the less money that you’ll spend on interest. The logic here is fairly simple. Having a credit score means that you essentially have a history of paying money back on time and making wise financial decisions. This will deem you as being credit worthy by the bank. No lender will want to loan money to someone that has a poor credit history and is known for not making payments on time.

Higher credit score= lower interest rates= less money spent on interest.

Less money wasted on interest.

With a lower interest rate, you won’t have to spend as much money on your home mortgage and car loans in the future. This means more money in your pocket. You really don’t want to get stuck with an absurd interest rate just because you made some poor financial choices in your 20s. You’re ready this because you want to know how to save tons of money. Right?

No need for a co-signor.

Do you really want to ask a family member to be a co-signer for you? I personally hate asking for any favours at all. With a low credit score, you might be stuck asking a family member for help when it comes to getting a loan. This could lead to awkwardness and you might not even find someone willing to sign for you. What will you do then? What if you can’t buy that new car because you don’t have a co-signor?

That’s why a high credit score can save you lots of money in the long run.

Alright so I can save so much money with a solid score. What’s nest? What can I do to start building your credit score in college?

Sign up for a credit card.

I recommend that you grab yourself a basic credit card with a small limit to get started. Now I know that there are many pros and cons to a credit card in college. The reality is that you should get a small limit so that you can handle yourself if you do happen to max out your card.

Pay off the balance.

You need to get into the habit of paying off your balance religiously. Now we can get into excuses but I’m not here for that. I’m a firm believer in paying off your balance. If you don’t have the money in your checking account, then you clearly are not responsible yet for a credit card.

Automate payments.

It will help you build a credit history if you automate our fixed expenses to your card and pay it off on time. My gym membership, utility bills, insurance, and cell phone all go towards my credit card. This has helped me build my credit history, while simplifying my financial life.

The only caveat is that you still need to check your bills for any discrepancies. No excuses!

Over time if you build up your credit score, you can save yourself tons of money in the long run. Have you been working towards improving your credit history? Please share your experiences with us here.

Check out the other article in the series:

The Power of Passive Savings.
You Need to Pay Yourself First.

(photo credit: mint_jinny)

You filled out all of the necessary forms, everything went through, and now you have your first and very own credit card. Congratulations. If you make your payments on time, a credit card can technically be a free short term loan. A credit card can also spell financial disaster for college students that aren’t prepared to use it responsibly. However, since you’re here reading this article, I’m going to assume that you’re a responsible young person that’s looking to use a credit card to build your credit score.

Before I share tips with you on how to keep a solid credit score in college, I wanted to explain to you the importance of a credit score:

It’s tangible proof of your responsibility level. Potential employers, Landlords, and Lenders will all check your credit score to see how responsible you are. Potential employers may use it as a filtering system. Landlords will simply not want to rent out a unit to a young person that has a poor credit score because this usually means a failure to make payments on time. Lenders (from cars to homes) will either charge you an extremely high interest rate (costing you lots of money) or not loan you the money at all.

Basically, a poor credit score can cost you a job, hurt your chances of finding a place to rent, and limit your options when it comes to a home or auto loan. Do you really want that to happen? This is why you need to pat yourself on the back right now and share this article with as many of your friends as possible. You’re on your way to being a responsible credit card user.

Okay now that you understand why your credit score is important, what exactly is your credit score made up of?

• 35% Payment history. This is pretty much your ability to make payments on time.
• 30% Amounts owed. How much money you owe compared to how much credit you have available to you.
• 15% Length of history. How long have you had your credit card for? How long have you been paying your credit card balance off?
• 10% New credit. The amount of new credit you have compared to old credit that you’ve had. This is where people argue that closing a credit card can hurt your credit score for the short term.
• 10% Types of credit. This is based on the different types of credit that you have available to you.

The last part of this credit score article is designed to help you use your credit card responsibly so that you can build your credit score through college.

Make credit card payments on time.

You must make all of your credit card payments on time. Now I know that shit happens and life isn’t perfect. You just need to understand that 35% of your credit score is made up of your payment history. Do you really want to hurt your credit score by making a late payment? If you do make a late payment, I urge you to call your credit card provider to find out if the late payment has been reported and if it will affect your credit score.

Automate your payments.

When you’re young, one of the best tips for building your credit score is to make consistent payments on your credit card on time. My favorite tip in this area is to automate your fixed payments to be directly billed to your credit card. I’ve setup my online subscriptions, gym membership, and cell phone to be directly billed to my credit card on a monthly basis. The consistent payment of my credit card has allowed me to build up my credit score through college.

Increase your credit score… when you’re ready!

Since 30% of your credit score is based on amounts owed, then technically the more available credit you have without using it, the more responsible you are. My credit limit is so ridiculously high that I don’t plan on sharing it with anyone anytime soon. When you feel that you’ve got a handle of your credit card, you can ask your credit card provider for an increase in your credit limit. This increase in your credit limit will also allow you to place major purchases on your credit card (group trips, television, etc.).

There you go guys! This comprehensive article should hopefully allow you to build your credit score through college.

Img src: Infusionsoft.

Sometimes I hear friends and family use credit reports and credit scores interchangeably. While they are definitely related, there are differences. I want to share how you can improve your credit report and how your credit score is determined.

Why is it important to be familiar with them? If you plan on getting mortgage, having a car loan, or even are shopping for car insurance, your credit report and score will most likely be checked. You want to have the best record you can have to get the best interest rate and deals.

Your Credit Reports

Your credit report is basically a record of your history of payments and helps lenders determine your credit worthiness. You technically have 3 credit reports, one with each credit bureau.

Credit Agency Contact Numbers

• Equifax: (800) 685-1111
• Experian: (888) 397-3742
• TransUnion: (800) 888-4213

In theory, they should have the same information, but sometimes you can have inaccuracies in any or all of them.

Get Free Credit Reports

The Federal Trade Commission has one site where you can really get your credit reports for free at annualcreditreport.com. If you do not have Internet access, you can also call 1-877-322-8228 to order your credit reports.

You should at least see if there are any mistakes on your credit report and fix them, as they can lower your credit score or put you in a bad light with lenders.

Your Credit Scores

Your credit score is a number between 300-850 that each of the credit agencies assign based on the information on your credit report. I wouldn’t get too hung up on credit scores, as leach bureau has their own little system. I would just shoot for 720 or higher.

By the way, you can’t get your credit scores with the Annual Credit Report site. They are completely separate. You can either buy your score from the credit agencies or you can use a service like myFICO.

If you want a general idea of your credit score, you may want to check out Credit Karma. It was in the ballpark when I tested it out.

Fixing Your Credit Score

While we don’t exactlyhow Fair Issac calculates your score, we do know what factors they take into account. Here’s how your score is broken down:

• 35% – Paying your bills on time: If you’re late with your payments, not only can you get a late fee charged to you, but after 30 days, it ges reported to the credit bureaus.
• 30% – Debt you owe and the amount of available credit: This measure how much of your lines of credit you are using. If you only have a $200 balance on a $1500 card, that’s better credit score-wise than having $200 balance on a $500 card.
• 15% – Your credit history length: This is basically keeping track of how long you’ve had your accounts. If you’re a new credit card holder, this will naturally improve the longer you have a solid history.
• 10% – New credit applications: A small part of your score is determined by how many accounts you’ve opened up recently.
• 10% -Different Types of Credit: I’m not crazy about this since it encourages several different types of debts. I think the less you have, the better. A mortgage and or a student loan already seems like more than enough debt.

It does take some time for improve your score, but it’s completely doable.

Your Thoughts on Credit Scores and Reports

Have you checked your credit reports recently?

Sometimes I get questions sent to me through the email that I thought would be a good topic for a post. I love to hear from readers and appreciate that you took the time to email me. Please feel free to contact me anytime.

I received a question yesterday from a gentleman about to get married.  It was regarding credit scores and reports, so I’m including a post for others to pitch in their advice and ideas.

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Reader Question

My fiance has a pretty low credit score (505 as of July) and I have a pretty high score (780 as of July).

She was irresponsible about 4 years ago when it came to money with about $4,000 of debit she racked up with bills, and credit cards. When she met me we settled with the collection companies and she has no outstanding personal debit.

However, she had an injury while in college through athletics and the school’s insurance is in the process of paying the medical bills, but some are on her credit report as of June. I disputed that they had been paid and they were marked as paid but still remain on her report. However, she still has some including a $10,000 bill that is in the process of getting paid by AIG.

So now that you have some background here are my questions.

1) what can I do about her credit report? are the things on there supposed to stay on there even though it was medical related and insurance was supposed to pay it?

2) should I add her to my credit cards and an authorized user in order to let her piggy back off of my score?

I don’t want mine to go down, but will hers go up as a result? I added her as an authorized user on the family cell phone plan in July and am interested to see if the account will show as good standing on both of our credit reports.

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Addressing Errors on Your Credit Report

First off, I’m going to say that I’m not a financial professional, so most of my information will be resources I found helpful and personal experiences.

Federal Trade Commission points you to the genuinely free link at annualcreditreport.com.

The three nationwide consumer reporting companies have set up one website, toll-free telephone number, and mailing address through which you can order your free annual report.

If you do not have Internet access, you can also call 1-877-322-8228.

Double check to see if there are any mistakes on your credit report and fix them.He mentioned that his fiance’s college is paying them, so I would suggest adding a note on her credit reports explaining that situation. Some people may not know this, but you can add comments to your records to explain blemishes. It will not remove it (accurate blemishes stay on for 7 years), but it can help.

Fixing Your Credit Score

While we don’t know the exact method of how Fair Issac calculates your score, we do know what they consider. It does take some time for it to improve, but this is how you raise your credit score. Here’s how your score is broken down:

• 35% – Paying your bills on time: If you’re late with your payments, not only can you get a late fee charged to you, but after 30 days, it ges reported to the credit bureaus.
  • How to fix it: Make sure you get current on all your bills and start paying them on time. Make sure you don’t have any accounts in collections. As you pay on time month after month, year after you, your FICO score will go up.
• 30% – Debt you owe and the amount of available credit: It’s not just how much debt you’re carrying, it’s how much of your available debt you’re taking advantage of. Another reason why it may not be a good idea to cancel unused credit cards.
  • How to fix it: If you don’t want to take a big hit on your credit score, don’t cancel too many credit cards at the same time, as it can have an adverse effect. You can also pay down your credit card debt and improve the debt/available credit ratio.
  • Don’t open an account JUST to increase your credit limit. Instead focus on paying down the debt.
• 15% – Your credit history length: This is basically keeping track of how long you’ve had your accounts.
  • How to fix it: This is easy to do, but it takes time. You just have to keep being responsible
• 10% – New credit applications: This considers how many accounts have been opened up recently.
  • How to fix it: Another simple one to improve, just don’t open too many accounts at once. Also remember that some banks pull your credit report so keep that in mind.
• 10% -Different Types of Credit: Having a mix of installment loans like a mortgage
  • How to fix it: This shouldn’t be a huge problem, so be aware of the accounts you have. DO NOT get a car loan so you can have an installement. Getting into debt to build a record is not a smart move.

It can be satisfying improving your credit score, but know that it won’t change overnight.

Your Thoughts

Do you have any tips for our reader?

As we’ve been going through the process of buying a house, I noticed I became more and more aware of my FICO score. I wanted to make sure we were raising our credit scores by choosing sound financial habits.

What’s a “Hard Pull” on a Credit Check?

Basically a “hard” pull is a credit check that can affect your credit score.  Hard pulls are visible to anyone who is checking your credit report, while soft pulls, like when you check your own report, are only visible to you.

FICO’s site explains a bit more on hard credit inquiries:

There are a few important considerations to keep in mind about inquiries:

1. All hard inquiries do not impact one’s score, as sometimes a single inquiry can impact it and sometimes you can have three or four that don’t.
2. When a hard inquiry impacts your score, the effect is usually only a few points.
3. While inquiries remain on your report for two years, the scoring formula only considers them for the first year.

To answer your question, inquiries are taken into consideration by the FICO scoring formula because research has shown that consumers who have recently taken on new credit obligations are more likely to be late on future payments than those who haven’t. And inquiries are the earliest indicators that new credit is being sought out.

Looking at this information, I’d play it safe and not have too many hard credit checks done; there is a chance that my credit score can be lowered. Please remember, though, if you’re making a purchase like a house or a car, this will not be an issue, as lenders expect to shop around for a good deal.

When Can I Expect a Hard Credit Check?

If you’re opening a credit card or you’re opening a line of credit, you’ll probably have a hard credit pull on your record. You may check with a customer service representative if you decide to open a new bank account, as some banks do a hard credit inquiry.

Get Your Free Credit Report

Make sure your credit report has correct information on it. If you want to check your credit report for free (completely free, not a free trial), then go to AnnualCreditReport. This can help you see if there are any errors on your credit report that you have to fix. it’s worth a look, since fixing errors can raise your credit score.

Photo Credit: liewcf