According to Credit Karma, the average credit score for people 18 to 24 is about 630. The 25 to 34 crowd fares even worse, with an average of around 625. And that’s for individuals who likely care about their credit scores more than average, since they’re members of Credit Karma.
This isn’t a great credit score. When you’re dealing with that kind of credit and brand new student loan payments, things can get tough.
But here’s the deal. Just because you’re young doesn’t mean you have to have a low credit score. Sure, some factors, like the average age of your credit accounts, you can’t do much about. But you can take steps to understand and improve your score so that when you graduate college, you’re off to a great start.
First, Understand How Your Credit Score Works
The first thing you should do is understand what your credit score looks like and how it works. This blog is full of deep dives into the different aspects of your credit score. But for now, let’s just look at a high-level overview to get you started.
It’s Based on Your Credit History
Your credit score is based on your credit history, also known as your credit report. Your creditors, including student loan companies, credit card companies, and collections companies, report to the credit reporting bureaus. These bureaus pull together the information in a file.
Then, credit scoring companies, such as FICO, apply an algorithm to the data in your credit history. That algorithm weights different aspects of your history more heavily than others. But it spits out the number that is your actual credit score.
Scoring Models are Different But Similar
Different credit scoring companies all have their own credit scoring models. So your score might look different if you get it from FICO versus VantageScore. But they do look at most of the same information, and they tend to weight things similarly.
We operate on the idea that when it comes to your credit score, the main factors, in order of importance, are:
- Payment History: Making payments on time lends itself heavily to a good credit score. Having late payments on your record can tank your score pretty quickly.
- Amounts Owed: If you owe a lot of money, particularly on revolving accounts like credit cards, compared with the amount of credit you have available, you’ll harm your score.
- Length of Credit History: The longer you’ve had credit, the more your score can rise.
- New Credit: Getting new credit, especially lots of if very quickly, can ding your credit score.
- Credit Mix: Having a mix of different types of credit accounts is, overall, good for your credit score.
Again, different scoring models weight these things in slightly different ways. But, generally, the two most important pieces of your credit score are your payment history and debt-to-credit ratio. Understanding that means you can tackle your credit score with the right plan to build it well.
Get into the Habit of On-Time Payments
If you’re like many college students, you already make some payments on debts. Maybe you have a low-balance credit card. Or maybe you have a car loan with your name on it. Even if you don’t make payments on debts, you likely have other accounts open in your name, such as a cell phone plan or utilities.
It’s essential that you make payments on these accounts on time, every time. Most creditors don’t report a payment as late unless it’s 30 days past due. But some report sooner than that. And even late utilities payments can go against your credit score if they become late enough to be reported to the credit bureaus.
Your best bet is to avoid this at all costs by making payments ahead of time whenever possible. If you can, put your payments on auto-pay so that you never miss one. If your income fluctuates too much to make this possible, keep a calendar or app with all your due dates, and do whatever it takes to make those payments on time.
Get a Credit Card, and Use it Wisely
Contrary to what you might think, having a credit card won’t hurt your credit score. In fact, responsible credit card use over time is a great way to keep your credit score looking up.
The key here is to use it responsibly. Ideally, this means paying off the entire balance in full every month. If you struggle with overspending, consider only using the credit card for specific expenses, such as gas or utilities. Then pay it off each month, and you’ll watch your credit score rise.
Along this note, having more available credit is better for your credit score. As your score climbs, you might consider asking for a line of credit increase or applying for a second card. Again, just make sure your spending stays the same and you make any payments on the cards on time.
Use an Installment Loan if You Need To
Having a mix of different credit accounts can be helpful, but you should only apply for accounts you actually need. So if you need an installment loan to buy a car, for instance, shop around for one and sign up. Again, just be sure to make all those payments on time. (Sounding repetitive? I know, but it’s the most important thing!)
Some people will tell you to get an installment loan just for the sake of increasing your credit score. But this is generally not the best option. Chances are you’ll eventually need a loan, even if it’s just your student loans. So don’t sweat this piece until the need actually arises.
Keep Track of Your Score Over Time
Studies show that people who look at their credit scores on a regular basis are more likely to watch them increase over time. Keeping tabs on your increasing score helps you continue to make good credit decisions.
Luckily, the internet abounds with free ways to keep an eye on your credit score. Credit Karma and Quizzle are two good options. And more and more credit card companies are offering their users access to a free monthly credit score.
These scores are likely to be educational scores, so they may not be the real FICO that potential lenders will see. But they are generally fairly accurate and can keep you on the straight and narrow when it comes to increasing your credit score.
There Are Limitations
You can graduate college with a good, or even an excellent, credit score. But you may not be able to graduate with a perfect score. That’s because part of your score has to do with the length of time you’ve had credit history. Leaving your oldest accounts open will improve this portion of your score over time. But just keep in mind that you probably won’t graduate college with a score of 800 if your oldest accounts are only a few years old.
However, by taking these steps and staying consistent, you can graduate college with a good score.