Credit scores matter more than you realize. They affect your ability to get a car loan, home loan, or even rent an apartment. So, what is a credit score, and how does it affect you? Even if you haven’t much thought about it, now is the time to think seriously about it. Knowing your credit score can help you go a long way.
Unfortunately, many students don’t know what credit score is. It might seem unimportant now, but building credit early can lead to financial success. A low or nonexistent credit score can make buying a car, renting a home, or getting a credit card hard. The good news is that learning about credit is easy.
This guide explains everything in simple terms. It contains vital information regarding how to calculate credit scores, how they can be influenced, and, most importantly, how you can start building credit as a student.
Are you set to take control of your finances? Here are some simple steps to improve your credit score!
What is a Credit Score?
A credit score is a three-digit number that reflects how responsibly you use money. It is based on your payment history, how much credit you’re using, and your debt. Lenders rely on it to determine whether you’re eligible for loans, credit cards, or even apartments.
Here’s who can check your credit score:
- Banks & Credit Card Issuers: When you apply for a credit card or loan, banks check your score to decide on approval and interest rates. A high score leads to better offers and lower rates.
- Landlords: Want to rent a cool off-campus apartment? Many landlords check credit scores to assess your financial responsibility. A low or no score may mean a larger security deposit or even denial.
- Insurance Companies: Some auto and renters’ insurance providers consider credit scores to set your premium. A better score can result in lower monthly payments.
- Employers: Certain jobs, especially in finance, may review credit reports to assess responsibility. A decent score can increase your chances of being hired.
Read: Why Your Credit Score Matters More Than You Think
How is Credit Score Calculated?
A credit score is very helpful as it determines how much capital you can borrow. It is calculated using five crucial factors, each of which carries a different impact:
- Payment History (35%): Your payment history is the most significant factor in your credit score. Making on-time payments shows lenders you’re trustworthy, but missed or late payments can sink your score quickly.
- Credit Utilization (30%): It compares the amount of credit that you are using to the amount that you have been allocated. Make sure that you maintain low balances, ideally below 30% of your available credit to ensure a good score.
- Length of Credit History (15%): The longer you have the accounts open, the better your score. This takes into account the age of your oldest and newest accounts, as well as the average age of all your accounts.
- Credit Mix (10%): Having a variety of credit types, such as credit cards, auto loans, and mortgages, can make your score better. Lenders also favor borrowers who take on different types of credit and manage them well.
- New Credit Inquiries (10%): Attempting to obtain a large amount of credit too quickly can negatively affect your credit score. Hard inquiries or when lenders check your credit for new applications can also temporarily lower your score.
Typically, your credit score fits into one of these categories:
- 800+ – Excellent
- 740-799 – Very Good
- 670-739 – Good
- 580-669 – Fair
- Below 580 – Poor
Related Blog: No Credit? No Problem! Build Credit Without a Credit Card
What Affects Your Credit Score the Most?
A credit score isn’t just a random number; it reflects how you manage money. Some mistakes can harm your score more than others. If you’re not careful, you may face higher interest rates, trouble getting loans, or even denial of an apartment. Here are common credit score mistakes students make:
- Missing Payments: This is the worst mistake for your credit score. One late payment can cause a big drop and stay on your report for up to seven years. Always pay at least the minimum on time.
- Applying for Too Many Credit Cards: Every new application will add a hard inquiry. When you make too many applications within a short timeframe, there’s a possibility that your score will drop.
- Closing Old Credit Accounts: A long credit history is beneficial. Closing your oldest credit card can lower your score, so keep it open if there’s no annual fee.
By avoiding these mistakes, you can build a strong score. This will save you money and open up better financial opportunities.
Why are There Different Credit Scores?
If you have analyzed your credit score across several apps or sites, you may have noticed a difference in numbers. This is normal. Scores differ based on the model that was scored and the agency that provided the credit information.
FICO and VantageScore are the two main credit scoring models. They both assign credit scores based on creditworthiness but do it differently. This is why your score can change depending on where you check it.
Here’s why credit scores can differ:
- Different scoring models: FICO and VantageScore each have unique formulas. Lenders may use one or both based on their needs.
- Varying Credit Report Data: Your credit score is derived from your credit report, and not every lender reports to every credit bureau. That means one bureau may have more information or different information than another.
- Multiple Credit Bureaus: The three major credit bureaus (Experian, Equifax, and TransUnion) gather data separately, potentially resulting in slightly different scores.
- Industry-Specific Scores: Certain lenders use specific scores based on their industry. For instance, an auto lender might adjust your credit score for car loans.
So, knowing these differences helps explain why your score might look different across platforms.
What Information do Credit Scores not Consider?
A credit score is an important number that lenders use to judge your financial responsibility. People often think their job, salary, or even their money in the bank is a factor, but it isn’t. Credit scores are determined solely by your credit behavior, not your entire financial picture. This means you might be earning six figures yet still have a poor credit score, or be a college student with a great one.
Here are things that credit scores do not consider:
- Your Income or Job Status: Your credit score does not depend on your income. Earning $500 or $50,000 a month won’t change it. But, your income is considered for loan approvals.
- Your Bank Account Balance: Having thousands in your checking or savings won’t raise your score. Credit scores reflect your credit activity, not your savings.
- Your Rent or Utility Payments (Unless Reported): Most rent and utility payments don’t impact your score unless reported to credit bureaus. Some apps can help add rent payments to your credit history, but by default, they don’t count.
- Federal Student Loans & Certain Other Loans: Federal student loans follow different rules. They don’t need a credit check for approval, and certain repayment plans won’t hurt your score, even if you defer payments.
Read: How to Manage Fun and Finances in College – Enjoy Life on a Budget
What Credit Score Do You Need to Buy a Car or House?
Credit score plays a huge role in whether you’re approved for a loan and what kind of interest rate you’ll get. If you’re looking to finance a major purchase, here’s a breakdown of the minimum credit score requirements:
- Car Loans: The majority of lenders expect you to have a 600+ credit score for auto loans. If you do receive approval with a lower score, then you should expect higher interest rates and less favorable terms.
- Home Loans: Most conventional mortgages want a credit score of at least 620, while government-backed loans like FHA will work with scores in the 500s to 580s if you can make a bigger down payment.
If your credit score is too low, do not fear. You get better at it by making payments on time, maintaining low credit card balances, and avoiding debt you don’t need.
Why Your Credit Score Changed
A credit score isn’t permanent; it will change depending on your money habits. Some actions can boost your score, while others may lower it. Here are factors that might have affected your scores:
- Late or Missed Payments
A credit score can be impacted negatively if you skip any repayments. Missed payments leave a red flag with lenders and could make borrowing more difficult down the line.
- Hard Credit Inquiries
Each time you apply for a new credit card, car loan, or mortgage, a hard inquiry shows up on your report. Having too many in a short time can lower your score and make you appear desperate for credit.
- Changes in Credit Utilization
If you suddenly reach your limit on your card or pay off a large balance, your score will reflect the change. It stabilizes your score to keep usage below 30%.
- Credit Report Errors
Mistakes can happen! If your score drops unexpectedly, check your credit report for errors. Look for incorrect late payments or unfamiliar accounts.
How Blitz AI Helps You Track & Improve Your Credit Score
Monitoring your credit score can be complex and takes time. Blitz AI simplifies this process, helping you make informed choices to improve your credit health.
- Automatically Tracks Your Credit Score: Blitz AI keeps an eye on your credit score and updates you in real-time. You don’t have to check it yourself; Blitz AI does the work for you.
- Sends Alerts Before Your Score Drops: Blitz AI alerts you about changes that could impact your credit. If you’re close to missing a payment or your credit usage is high, you’ll receive timely notifications.
- Provides Insights on How to Improve Your Score: Blitz AI reviews your credit history and offers personalized tips to improve your score.
- Suggests the Best Financial Products: Based on your credit profile, Blitz AI recommends credit cards, loans, and other products that fit your needs and approval chances.
Read: The Student’s Guide to Finding the Best Deals
Conclusion: Take Control of Your Credit Today
Keeping a good credit score may not seem important at this moment, but it will affect your future more than you know. Your credit score has a big impact on renting an apartment to obtaining a car loan. The strongest foundation to “start strong” on is paying your bills on time, using only a fraction of your designated credit, and having no unnecessary debt. These simple habits will help you win money in the long run.
Want to keep on top of your credit score without the hassle? Blitz AI monitors your credit, offers personalized tips, and allows you to improve your score with ease. Instead of having to guess what has an impact on your credit, you’ll have an intelligent guiding tool.
Blitz helps students manage their finances and track expenses. It also offers insights into your credit health. This makes it easier to build credit without a credit card while keeping spending in check. Smart budgeting is essential for improving your score. Download the app here.
