We all know college admissions have become increasingly competitive, and test scores and GPAs are of a much greater focus for high school students than ever before. But there is a score that matters even more after high school graduation — your credit score.
I spent last week working with a group of young women who will be graduating from high school in a few short weeks. We talked about how they will be building their financial foundation when they go off to college and start managing money on their own.
One tricky concept for young people to understand is that once a person takes out a loan — whether it is a credit card, a student loan, a car loan, or other types of loans — she has begun her credit history. This means that every payment made or missed will be recorded with credit bureaus, and included in that all-important financial metric, your credit score.
I explain to students that a credit score is shorthand for how risky a borrower you are — meaning, how likely it is that you will pay back a loan in full, and on time. How credit is handled out of the gate can have an impact on borrowing ability and interest rates well beyond that time.
According to myFICO, a credit score is made up of the following components:
- 35% — Payment history
- 30% — Amounts owed
- 15% — Length of credit history
- 10% — New credit
- 10% — Types of credit used
Credit scores not only impact the ability to borrow and the interest level you pay for credit, but can have significant life impact as they may be of interest to prospective employers and real estate brokers or landlords. Utility companies and cell phone providers may use your credit score to determine whether you need to make a deposit in order to get a contract.
In order to manage this all-important financial numeric, I teach students to do the following:
1. Understand the terms of all outstanding loans, and make the necessary payments in full, and on time.
2. Make sure your lenders have your current address. College kids and young-20s tend to move around a lot, but if your lender can’t find you, it is not an excuse to miss payments.
3. Maintain communication with your lenders. If you have questions about the terms of your loan, ask your lender. If you are having trouble making a payment, call and find out what your options are.
4. Know your credit score. Check your score and credit history at least once a year.
There is a lot to know about managing credit — including managing how much you borrow — and that information is too lengthy to fit in one blog post. However, it is important that young people understand that once they start borrowing money in any form, they are beginning a credit history that will significantly impact their financial life now and in the future.