8.1: Credit

“Financial Literacy and Savings” by Asia Pathways is licensed under CC BY-SA

Introduction: Financial Health

Much like our physical and mental health, our financial health is extremely important. When we talk about our overall health, we often neglect the topic of our finances. Financial stress not only affects our mental and physical well-being but also can affect our ability to finish school or gain employment. This chapter will introduce you to tips and strategies to assist you in maintaining your financial health and well-being.

This chapter focuses on personal finances, but as a college student, financial aid and paying for college are important elements of your financial health. Please see the “College Resources and Policies” chapter for information about how to apply for financial aid including student loans, grants and scholarships.

We would like to thank the Pennsylvania State Employees Credit Union (PSECU) for providing most of the content in this chapter. PSECU is a credit union with locations around Pennsylvania, including some locations on HACC campuses. To learn more about PSECU, please visit their website at psecu.com.

Money Management Essentials

Content provided by PSECU, Pennsylvania State Employees Credit Union.

A lot of things compete for college students’ attention. Finishing assignments, passing exams, looking for jobs or internships, managing family obligations - the list goes on and on. While these tasks are all important things on which to focus, learning how to manage your personal finances is crucial as well.

Personal finance is a broad subject made up of many components. We’ll zero in on a few key areas – credit, choosing loans and managing debt responsibly and budgeting. Understanding these money management essentials can help you build a strong financial foundation to support your success now and in the future.

Credit

Many potential lenders, employers, and landlords, among others, will check your credit to determine if you’re a qualified borrower, employee, or tenant. If you don’t know much about credit, you may just cross your fingers and hope for the best when someone asks to check your credit. With so many important things riding on credit, however, students should get informed now.

What is Credit?

Everyone talks about “credit,” but it’s rare to hear someone explain what it actually is. Simply put, credit is your ability to borrow money or to buy something without paying in full upfront.

You may need to utilize credit when making large purchases, like a home or car, which many people don’t have the cash to buy outright. Even if you’re not planning a large purchase, credit will play a vital role in smaller tasks, like applying for a credit card, getting approved for a cell phone plan, or turning on utilities in a new apartment. The better your credit, the more likely lenders or providers are to believe that you’ll pay off your debt in the future and the easier these tasks, among many others, may be for you.

How Does Someone Check Your Credit?

Now that you know what credit is, you may be wondering how someone can check it. Typically, when someone says they are going to check your credit they are referring to your credit score and/or your credit report.

Credit Scores

Your credit score is a three-digit number that allows whoever is checking to compare you against other potential borrowers. There are many different scoring models, and what is a “good” score can vary between each one. In general, though, a higher score reflects better credit.

A credit score has five different components. Each component makes up a percentage of the score, as indicated below:

• Payment History (35%) – Paying bills on time is the best way to build and maintain good credit. More than a third of your credit score is based on this simple habit. Missing a payment can impact your credit score negatively for up to seven years, so keeping track of when your payments are due is important.
• Amount Owed (30%) – How much you owe accounts for almost a third of your credit score. Even if you always pay your bills on time, carrying high balances on credit cards or large amounts of debt can hurt your score.
• Length of Credit History (15%) – This part of the credit score reflects how long you’ve had established credit and the average ages of your accounts. Typically, the longer you’ve had established credit, the higher this portion of your credit score will be.
• Credit Mix (10%) – There’s a difference between revolving credit and installment loans. Revolving credit is credit that is available to you on an ongoing basis. When you spend a portion of the credit, that credit is unavailable until you pay it back. Once that credit is paid back, the credit is available for you to use again. A good example of revolving credit is a credit card. Installment loans, on the other hand, are debts that are paid off in set monthly payments. The money doesn’t become available again after you repay but simply reduces the amount you owe. The most common examples of installment loans are student loans or car loans. Installment loans typically are seen in a more positive light than revolving credit. The mix of credit types you use impacts this portion of your score.
• New Credit (10%) – Each new credit account you open impacts your credit score. Therefore, you should avoid opening multiple accounts over a short period of time. The exact impact may depend on the type, dollar amount, and number of new accounts, but overall, borrowers who have opened several new accounts in a short period are riskier to lenders.

Credit Reports

Your credit score is calculated from information in your credit report. In the same way that your school transcript is a record of your academic history, your credit report is a record of your financial history. It gives those who are checking your credit a more in-depth look at what’s behind your credit score.

Your credit report contains four main sections:

• Personal Information - This section includes identifying information that links the report to you, such as your name, birthdate, Social Security number, and address.
• Account Information/Trade Lines - This portion shows what credit accounts you have open, the total amount of each loan or credit limit, what payments you make, and whether or not you make your payments on time. It may also show closed accounts. Closed accounts typically remain on your report for up to ten years if those accounts were in good standing when closed and seven years if the accounts were charged off or in bad standing.
• Public Records - If there are verifiable financial judgments, bankruptcies, or tax liens in your name, those records will be displayed in this section.
• Inquiries - If you’ve applied for credit or anyone has checked your credit in the past two years, those inquiries will be listed here. There are two types of inquiries listed in this section:
• A hard pull generally means a lender is looking at the report to make a lending decision, such as when you apply for an auto loan or to open a new credit card. These inquiries sometimes are labeled as “viewable to everyone,” which means anyone checking your credit report can see these inquiries.
• A soft pull is not done to make a lending decision, but for another purpose, such as monitoring your own credit. Soft pulls have no effect on your credit score and sometimes are labeled as “viewable only by you,” because these inquiries won’t display on your report when others check.

Can I Check My Own Credit?

Now that you’re aware of all the people who may inquire about your credit, you may be wondering “Can I check my own credit?”

The answer is yes. You can and should check your credit on a regular basis. Keeping tabs on your credit not only helps you understand your financial standing, but also can aid you in identifying and stopping fraudulent activity that could be occurring in your name.

How to Access Your Credit Report

You’re entitled to a free copy of your credit report from each of the three major credit reporting agencies once a year. You can access these free reports by visiting AnnualCreditReport.com’s website.

When you’re checking your credit report, make sure you’re typing in the correct URL. You’ll have to enter personal information, such as your name, date of birth, and Social Security number, in order to access your report, so you want to make sure you land at the correct site. You shouldn’t be prompted to provide any financial account or credit card information if you’re in the right place.

In a typical year, you’ll be able to see your report for free from each agency once a year, meaning once every 12 months, not once a calendar year. You can choose to check your reports from all agencies at once or space out your inquiries so that you can see a different report every few months. Some people prefer to see them all at once so they can do a thorough review of all reports at the same time. Others prefer to space out the reports, so they have a more frequent pulse on their credit. There’s no wrong or right approach - it's simply a matter of personal preference.

Once you pull your report, you’ll want to review the report for accuracy. To help you through this process, view the Credit Report Review Checklist and information about reporting errors in this chapter.

How to Access Your Credit Score

When you’re reviewing your credit report, you’ll notice that your credit score isn’t included. Unlike your credit report, there are no regulations granting you free access to your credit score. In many cases, you must pay to see your score. However, some financial institutions provide members or customers with monthly or quarterly access to their credit scores by meeting certain criteria such as opening a checking account or taking out a loan.

Credit Report Review Checklist

You can request your credit report for free once a year from three major credit reporting companies at www.AnnualCreditReport.com. Once you’ve downloaded your credit report, use this checklist as a guide to review each section.

• All my personal information is correct, including:
  • Name
  • Social Security number
  • Current and previous address(es)
  • Current phone number
  • Marital status
  • Employment history
  • Any additional personal information listed
• All items listed in the Public Records section, if any, are correct.
• All accounts listed in the Accounts Open/Trade Lines section are accounts I opened.
• All information in the Accounts Open/Trade Lines section is correct, including:
  • Account numbers
  • Status of all accounts (open vs. closed)
  • Ownership of accounts (i.e. individual, joint, or authorized user)
  • Payment history (i.e. current, 30 days delinquent)
  • Current balances (including debts paid in full)
• All hard inquiries (sometimes listed as “viewable by others”) are correct.
• I have saved my credit report in a secure digital or physical location.
• I have noted and reported any errors found on my credit report, using the instructions in italics below.

If you find errors or believe an account was opened fraudulently in your name, visit Link Annual Credit Report Dispute [www.annualcreditreport.com] for information on filing disputes with the credit reporting agency that issued the report and the business that provided the information.

How Can I Build or Repair Credit?

The more you realize the importance of credit, the more concerned you may become with building and maintaining good credit. Here are some tips to help you get started whether you’re establishing credit for the first time or repairing your credit after getting off track.

• Pay all bills on time – As previously noted, payment history makes up more than a third of your credit score. So, making payments on time not only helps you avoid late fees, but keeps you from negatively impacting your credit as well. If you need help remembering when your payments are due, consider setting up reminders on your phone or calendar.
• Don’t open several new accounts at once – Consider credit and loan offers carefully. Make sure a credit card is one you’ll use with a good interest rate and no or low fees.
• Use credit cards responsibly – Only make purchases you can pay off in full to avoid carrying a balance and accruing interest. Before you open a credit card, understand the interest rate and be aware of any associated fees or penalties.
• Make paying down a debt a priority – Make more than the minimum payment on credit cards and loans whenever you’re able. Avoid accruing new credit card debt and talk with your creditors about how to bring your accounts into good standing if you’ve made late payments in the past.
• Monitor your credit – Keeping tabs on your credit can help you identify any incorrect information or fraudulent activity immediately. Getting these items off your report may help increase your score.