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Establish good credit now for future success.
Credit is a vital component of any good financial plan. While it may seem intimidating, a healthy credit history will ensure your ability to graduate with a credit score and background that make it possible to start post-Princeton life on a good foot. A great credit score, for example, will enable you to rent an apartment and finance a car with favorable terms. A basic understanding of how credit works and a solid management plan are all you need.
You may have already heard these terms related to credit and financing and, while related, they are two different concepts. A credit report is a detailed report of your credit history. It contains your personal information, employment information, and the status of all open (current) and closed (past) credit accounts. This report can be used by potential lenders, landlords, and employers as a test of creditworthiness. The information within your credit report is tracked by three major credit bureaus: Equifax, Experian, and Transunion. While your report from each of these bureaus is likely to be similar, there may be differences, so it is a good idea to review your report from each bureau. You may obtain a free copy of your credit report three times a year, once from each bureau, by visiting www.annualcreditreport.com.
A credit score is a numerical value assigned to you primarily based on your credit report; it provides a snapshot view of your credit at one point in time and can go up and down. The most common scoring model is the FICO score, which ranges from 300 to 850. A higher score reflects better creditworthiness and lower risk of defaulting on a loan. With a higher score, you may be able to negotiate lower interest and other favorable terms when borrowing in return for the lower risk you present to lenders. This is useful when thinking about graduate school, auto loans, insurance, and mortgages.
The simplest way to begin building your credit history is to apply for a credit card. The bank or credit union where you manage your checking and savings accounts may have credit card options geared toward students. Making modest purchases and paying off the balance in full and on time each month will build your credit history while avoiding interest. In contrast with a debit or check card, when you use a credit card, money is not immediately taken out of your account, so you must be able to keep track of your spending to successfully use a credit card. Before applying for a credit card, create a budget that you would be comfortable working with each month.
To calculate your credit score, bureaus utilize a mix of factors to measure your risk.