For many students, credit scores may seem like a distant concept – something to think about later in life when mortgages and business loans become frequent necessities. However, understanding these early can set you up for financial security, helping you seek better deals on loans, rental agreements, and even payments as small as phone bills. Let’s break down what a credit score is, why they’re so important, and how students like you can take control of your financial futures.
What is a “Credit Score”?
A credit score is a representation of your creditworthiness or – put simply – how reliable you are at repaying borrowed money. Credit scores are usually calculated by credit reference agencies such as Experian, Equifax, and TransUnion. Your score is based on various subjects. These include your borrowing history, repayment behaviour, and credit utilisation.
Credit scores typically range from 0 to 999, depending on which agency is handling yours. A higher score indicates a lower risk for loaners, which means have a better track record for loans and credit product. This makes you favourable to loan to. Unfortunately, a lower score can naturally limit your financial options.
Why Should Students Care About Credit Scores?
As a student, you more than likely believe you have no need for credit just yet, but maintaining a good credit score from an early age can benefit you greatly. An impressive credit history can make it easier to secure rental agreements, as many landlords and letting agencies check credit scores before approving tenancy applications. It can also lead to lower interest rates on personal or car loans, saving you money in the long run. A high credit score gives you access to better credit card offers, including those with cashback and rewards, which can help you manage finances more effectively while giving incentives to keep doing do.
Additionally, some employers review your credit history as part of their hiring process. Even everyday expenses, such as phone contracts, can be impacted by your credit score, with poor credit potentially requiring higher deposits or limiting your options to pay-as-you-go plans. Understanding and improving your credit score as an undergraduate can make financial decisions easier and more cost-effective in the future.
How is a Credit Score Calculated?
Several factors contribute to your credit score, and understanding these can help you manage and improve your score:
Payment History – This is the most important factor for securing a healthy credit score. Making timely payments on any credit agreements is vital. Late or missed payments can significantly damage your score.
Credit Utilisation – This refers to how much of your available credit you are using, and how frequently. Keeping this below 30% of your given limit is a safe bracket to abide by.
Types of Credit & Length of Credit History– A mix of different credit types, such as credit cards and loans, can help build your score. This, of course, requires a good level of keeping track on general spending between these different sources. A longer history of responsible borrowing positively impacts your score.
New Credit Applications – Frequent applications for credit can make lenders view you as ahigher risk. Try to avoid applying for new credit too often.
How Can Students Build a Good Credit Score?
Even if you have little (or no) credit history, there are steps you can take to start building your credit score:
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Register on the Electoral Roll!
Being registered to vote at your current address makes it easier for credit agencies to verify your identity, which can boost your score.
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Get a Student Credit Card
Some banks offer credit cards specifically designed for students. Using one responsibly by making small purchases and paying the full balance each month can help gradually build your credit history.
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Pay Your Bills on Time
If you have utility bills, a mobile phone contract, or a subscription, ensuring timely payments will reflect positively on your credit report.
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Open and Manage a Bank Account
A well-managed student bank account, particularly an overdraft that is used responsibly, can contribute to your creditworthiness. Don’t use this as an excuse to dip into your overdraft frequently, though – this isn’t necessary.
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Avoid Taking on Unnecessary Debt
While borrowing can help build credit, excessive debt can negatively affect your score if not managed properly. Only borrow what you can afford to repay.
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Monitor Your Credit Report
Regularly checking your credit report (which you can do for free online through services like Clear Score, Experian, or Equifax) allows you to spot errors and detect potential fraud.
Common Myths About Credit Scores
There are countless rumours about credit scores that can lead to poor financial decisions. Let’s quickly debunk a few that are easily avoidable:
“Checking your credit score lowers it.” – This is not true! Checking your own credit report (a soft check) does not affect your score. However, applying for credit frequently (leading to hard checks) can lower your score temporarily.
“You must be in debt to have a good credit score.” – Once again, false. Using a credit card responsibly (by paying it off in full each month) can build credit without carrying debt.
“Student loans affect your credit score.” – Here in the UK, student loans do not directly impact your credit score. However, lenders can consider your overall financial commitments when assessing affordability. This isn’t applicable to all lenders, of course.
Written by Jayden Robinson – Lifestyle Features Editor
