Your Real World GPA: What It Is & How To Keep It Fresh
There are many signs that you've finally joined the so-called ‘Real World,’ and left the antics of adolescence behind. You no longer drink wine out of a coffee mug, and it’s no longer $3 a bottle (Charles Shaw, anyone?). You have houseplants that are no longer of the cactus variety – and they're all still alive. You no longer hang posters on your walls without any frames. And – probably one of the biggest reliefs upon reaching adulthood – you no longer have to fret over your GPA. There is another number you should keep an eye on throughout your twenties and thirties though: your credit score. Think of it as your ‘Real World’ GPA.
Your credit score is important for a number of reasons as lenders will use it to determine the interest rate on things like credit cards, car loans and – the big one – mortgages. The better your credit score, the lower your interest rates will typically be. But if you have poor credit, or no credit at all, most banks won’t grant you a loan to begin with.
Credit scores can range from 300 to 850, and anything over 700 is generally considered good. So, how do you achieve a stellar credit report? The first thing you're going to want to do is check your credit score. There’s no point in working your butt off if you can't see your progress, right? You can check your credit score once a year for free at annualcreditreport.com (though many sites advertise free credit checks, this is only one with no strings attached). This site will not just provide your credit score but a full credit report, which is what most lenders will see when they pull up your information. There are three companies that provide credit reports – Equifax, Experian, and TransUnion - and you can get a free report once annually from each company – which means you can technically check it three times a year. But keep in mind your score will vary between companies since they calculate scores differently, so it’s a good idea to check all three if you can.
If your score is lower than you expected – don't get discouraged! You CAN bring it up! Raising your credit score is the first step to gaining and maintaining your financial independence.
First, try to avoid the things that hurt your credit score. Since the greatest portion of your score (about 35%) is made up of your payment history, try to pay your bills on time. And remember, a late payment is better than no payment at all.
30% of your score is determined by credit utilization. Paying off credit card debt is one of the fastest ways you can raise your credit score. And maxing out your cards? That’s one of the fastest ways to lower your score. Here’s a general rule of thumb – if you can’t afford to pay for it in cash, don't buy it.
A quarter of your score is the length of your credit history and the types of credit you currently have. If you have several different types of credit (credit card, mortgage, student loan), and are able to make the minimum payments on each, this can reflect positively on your score.
The last 10% of your score is determined by credit inquiries, which show up when you apply for more credit, like auto or personal loans. These inquiries will only stay on your credit report for two years though, so it’s easy to bounce back form applying for a loan that you didn't get.
Moral of the story: don’t get discouraged! Even if you can't save money right now, you can still improve your credit score, and that will benefit you for years to come. You can increase your score by 10% by simply not applying for any more loans. (Though if you're sure you'll get it, some financial analysts recommend applying for credit – and then not using it. This will lower your credit utilization, or the amount of credit you've used relative the amount you have available to you. And that’s a whopping 30% of your score.)
Gaining your financial independence can be stressful and scary, but it will also be incredibly rewarding. It is possibly one of the greatest things you can do for yourself, and standing on your own two feet will be so worth the penny-pinching you had to do to get there.
But remember: The biggest investment you can make is in yourself. Your greatest financial asset will not be your home or your car, but your income-earning potential. If there’s a class you've been wanting to take, or an entry-level position in an industry you've been yearning to try out – go for it! Student loans, surprisingly, are one form of credit that do not affect your score as much as you might think, as long as you make the minimum payments on time. So go for that 4.0. And then watch as it helps you climb your way to 850.