Students, Know The Ins and Outs of Credit Before Trying to Fix It

Graduation may be an exciting time for many college students because it might allow them to pursue newly found interests, and also because they may be able to gain some more financial independence. But where the latter condition is concerned, there are some other pressing matters they may need to address first.

While getting a job right out of college may allow a student to move to a new city and start to build a life on their own, it also gives young adults the opportunity to begin establishing themselves as worthy borrowers for all kinds of credit. Unfortunately, many of these would-be borrowers have likely also made credit missteps in their past that could have led to their score being diminished, sometimes considerably. However, as with anything a college student might have learned from their professors in the recent past, it's also important for these young adults to know the basics of repairing credit before they dive headfirst into serious efforts to do so.

What matters most
In general, there are two serious credit missteps that can lead to a young borrower's score being significantly reduced, and they may be particularly susceptible to making them because they simply have less experience in dealing with various types of accounts, which for many include credit cards, auto financing, and of course, student loan payments

The one biggest factor used to determine a person's credit score is their ability to make payments on time and in full every single month into each account held in their name. In all, payment history makes up 35 percent of a person's credit score, and this portion is determined very simply. The less often a person makes payments on time, the lower this part of their score will be, and conversely, more on-time payments will allow them to boost this aspect of their score. In general, consumers who want to max it out should make several months' or more worth of payments that meet every deadline and minimum dollar requirement at the very least. On the other hand, even one missed obligation, whether it's by a day or a dollar, will take a huge chunk out of a person's credit score, and obviously repeated missed payments will take an even larger toll.

The other major credit score factor that may be particularly problematic for those who are new to borrowing is one known as "credit utilization ratio." This is just an industry term for a very simple concept: the amount of money someone is borrowing as a percentage of their total credit limits. For example, if all of a person's credit cards have a total combined credit limit of $5,000, and they have $1,000 in outstanding debts, then their credit utilization ratio is 20 percent. Lenders would love to see a ratio that low, as they generally feel that the lower one's ratio, the better off they are financially, and therefore the more trustworthy they will likely be when it comes to other borrowing. Having a low credit utilization ratio — in general, one of 30 percent or less will max out this portion of a score — shows lenders that borrowers aren't racking up too much debt and are likewise diligent in paying it down every month.

Some other factors
There are three more considerations that also go into determining a credit score, but they're not as easy to fix. The first, which accounts for an additional 10 percent of one's score, is the number of different types of credit a person has in their name. Those who have credit cards, student loans and auto financing are probably doing well here, because that's three different types of credit, but adding more will help as well; it shows lenders a borrower can responsibly juggle a number of obligations.

The final two factors make up 25 percent of a score. The first 15 percent is the average length of time one has held all their various accounts, and longer is considered better. The other 10 percent is the number of times a borrower has applied for new lines of credit in the past few months, and those who want to max out this portion of their rating should avoid repeated attempts to obtain an account, particularly if they are rejected.

Take action
Armed with this knowledge, young borrowers can go about fixing their credit responsibly. Taking time to reduce outstanding debts and make sure all payments are made on time are the two simplest ways to get back on track, but those who do so should understand that this will also take several months or more of diligent work.

It may also be helpful for borrowers to order copies of their credit reports and check them over closely for unfair markings. If any are discovered, working with a credit repair law firm may help to correct the issue.