How can I maintain/improve my student credit?

How can I maintain/improve my student credit?
Step 1: Obtain your credit report.

Because scores are computed based on the information in your credit report, the first step is to obtain a copy of your credit report. If you have been declined for a loan or credit-based service, you are entitled to a free copy of your credit report; contact the declining lender for more information. All US citizens and permanent residents are also eligible for one free credit report from the credit bureaus annually.

Otherwise, obtain a copy of your credit report for a nominal fee.

Step 2: Clean up your credit report.

Review your credit report for accuracy. Even in cases where information is accurate, you are permitted and encouraged to submit your own information to be appended to your credit report. For example, if you have missed a payment due to loss of a job, you can submit that information to be included when a lender requests your credit report.

Read our Step by Step Tutorial on Repairing Your Credit Report

Step 3: Review the FICO Score Breakdown.

We presented earlier the FICO score breakdown. Based on this, you can choose the strategy you want to use to improve your credit.

35% Payment history
30% Outstanding debt
15% Length of your credit history
10% Recent inquiries on your credit report
10% Types of credit in use

Payment history examines how you've made your payments. Did you make payments on time and in full? If you have late payments, how late are they?

Outstanding debt examines how much you've borrowed, both in dollar amount and in perecentage of available credit. For example, a credit card with a $15,000 limit that is charged to $14,998 (99% debt load) is penalized more heavily than two credit cards with $15,000 limits that are charged $7,449 each (49% debt load each).

Length of credit history examines how long you have been a borrower. There are some lending institutions that will not lend to persons with short or no credit histories.

Recent inquiries on your credit report tracks how many institutions have inquired about your credit. A large volume of inquiries, especially from similar institutions (such as mortgage brokers) may indicate a significant need for credit and is considered negative.

Types of credit in use looks at how many forms of credit you have. Positives include a variety of credit types with little repetition, such as a mortgage, auto loan, credit card, etc. Negatives would be a series of credit cards or home equity loans. The more diverse and non-repetitive your credit is, the better your score.

Step 4: Cease adding new debt - use only a few student credit cards

While this may seem overly obvious, it's not easy to implement. Put together a monthly budget on a simple spreadsheet and determine how much you are spending. Adjust your spending habits so that your income always exceeds your expenses by at least 10%, or the minimum monthly payment on your largest debt, whichever is larger. If you have a number of student credit cards, close the ones you don't use.

Download our monthly cash flow workbook!

Step 5: Turn over a new leaf.

Given that 65% of your FICO score is based on outstanding debt and payment history, the next most obvious step is to reduce one of the two. You cannot change your past history, unfortunately, beyond adding your own documentation and comments to your record. Only time can change that first 35% as you develop a successful credit history. Your credit history is a moving target - each new day adds a new entry to your record and drops a day off the tail end of your history. That brings us to the next point:

Make a commitment to yourself: pay your bills with the minimum requried payment or better when due.

Nothing will help you improve your credit faster than simply making the required payments to your creditors when due.

Step 6: Reduce your debt load - pay down the balances on your student credit cards.

The next 30% of your credit score is how much debt you have - the money you owe to the student credit card companies. Personal finance advocates will rightly suggest that you pay off your bills as quickly as possible, starting with the loans that have the highest interest rates first. Doing so is sound fiscal policy.

However, recall that you are also penalized for loans and student credit cards which you have nearly reached or reached the credit limit. Make a best effort to reduce your debt load on these loans to 75% or less of the total available credit.

If your goal is overall financial health, devote your attention to the highest interest rate loans first. Refinance them if you can, otherwise pay them down.

If your goal is primarily improved credit, reduce your debt loads on maxed-out loans first, then focus on interest rates once your debt loads fall below 75%.

Step 7: Consolidate your debts.

Recall that the number of loans and types also matters - 10% of your credit score. Consolidate as many of your debts as you can. Use Student Loan Consolidation to reduce the number of federal student loans you have outstanding. Avail yourself of student credit card consolidation services when it makes sense to do so. If you have mortgages and home equities, consider refinancing to lock in a historically low interest rate and reduce the number of total loans.

Concluding Points

Your credit rating, score, and report are the keys to financial freedom in the modern world. Good credit opens doors, bad credit closes them. We hope you have found this tutorial to be handy and helpful. As your credit builds and improves, the rates and terms on new student credit cards you get will improve.

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