How Credit Scores Work: A College Student's Guide

The habits you build with credit in college can shape the rates you pay on cars, apartments and loans for years, so it helps to know what the score is actually measuring.

At some point soon, someone will check your credit. It might be a landlord, a car lender, a phone company, or a credit card issuer. Understanding how credit scores work now can make those moments a lot less stressful.

The good news: the rules are not secret. The company behind the most widely known score has published what it looks at, and the habits that help are simple.

What a credit score is

A credit score is a three-digit number that estimates how likely you are to repay borrowed money on time. Lenders use it to decide whether to approve you and what interest rate to charge. According to the Federal Trade Commission (FTC), cellphone providers and auto and home insurance companies may also use credit scores.

Your score is calculated from your credit report, a record of your borrowing and payment history kept by the three major credit bureaus: Equifax, Experian and TransUnion.

A few basics:

• Most scores range from 300 to 850, according to the Consumer Financial Protection Bureau (CFPB). Higher is better.
• You have more than one score. The CFPB explains that your score can differ depending on the scoring model, which bureau's data is used, and even the day it was calculated. FICO and VantageScore are two well-known scoring companies.
• No credit history isn't the same as bad credit. If you've never borrowed, you may not have a score yet. That is common for students.

The five FICO score factors

FICO publishes the general weight of each factor in its scores. These are averages for the general population. For any one person, the importance can vary.

1. Payment history (35%). This is the biggest piece. Lenders want to know if you have paid past accounts on time. Late or missed payments can hurt your score. FICO also looks at how overdue a late payment was, and older problems count less than recent ones.

2. Amounts owed (30%). This looks at how much you owe compared with how much credit you have. For credit cards, this is often called credit utilization: your balance divided by your credit limit. If you have a $1,000 limit and a $700 balance, your utilization is 70%. Using a large share of your available credit can suggest you are stretched thin. Lower is generally better.

3. Length of credit history (15%). A longer history generally helps. This includes how long your oldest account has been open and the average age of your accounts. Students usually score lower here simply because they are new, and that improves with time.

4. Credit mix (10%). This is the mix of credit you have, such as credit cards, retail store cards, installment loans (like student or car loans), and mortgages. You don't need every type, and it is rarely worth taking on debt just to improve your mix.

5. New credit (10%). Opening several new accounts in a short time can signal higher risk, especially for people with a short credit history. Each application for new credit can show up as an inquiry, a record that a lender checked your credit.

Put simply: pay on time and keep balances low, and you have covered about two-thirds of what FICO looks at.

Myths students often believe

"Checking my own credit will hurt my score." It won't. The CFPB says checking your own credit report is not an inquiry about new credit, so it has no effect on your score.

"I need to carry a balance to build credit." You do not need to pay interest to build credit. Paying your card in full each month still shows on-time payments.

"My student loans don't count." Student loans are installment loans and are part of your credit report. Paying them on time can help your history. Missing payments can hurt it.

"Closing old cards always helps." Closing a card can lower your total available credit, which may raise your utilization. It can also affect the age of your accounts over time.

How college students can start building credit

Building credit is mostly about time and steady habits. Some common first steps:

• A student or starter credit card. Use it for a small, regular purchase, like a streaming service, and pay it off in full each month. Note: under federal rules, a card issuer can't open a card for someone under 21 unless the applicant shows an independent ability to make the payments, or has a cosigner who is at least 21.
• A secured credit card. You put down a deposit, which usually becomes your credit limit. It works like a regular card for building history.
• Becoming an authorized user. A parent or relative with good habits may add you to their card. That account's history may show on your report, but not every issuer reports authorized users to all three bureaus, so it's worth asking. Their habits matter, since a high balance on that card could affect you too.
• Paying every bill on time. Set up autopay for at least the minimum payment so nothing slips through during finals week.
• Keeping balances low. Try not to use most of your limit, even if you pay in full.
• Applying only when you need to. Space out applications for new credit.

How to check your credit

You can get your credit reports from all three bureaus for free at AnnualCreditReport.com. The FTC calls it the only website authorized by law for free credit reports. Reviewing your reports helps you spot mistakes or accounts you don't recognize, which could be a sign of identity theft.

Your credit score itself may be available for free through your bank, credit union, or card issuer. Remember that the number you see may not be the exact score a lender uses, since there are many scoring models.

This article is for education only and is not financial advice. Everyone's situation is different.