Dear Jeff,
I just started university and have finally gotten approved for my first credit card. I often hear the terms ‘credit report’ and ‘credit score’ discussed in connection with credit cards. Can you explain the difference between the two, and possibly give me some advice in order to use credit to my advantage while I’m in school?
Alexandra B.
Moose Jaw, Saskatchewan
Thanks for the questions, Alexandra!
I can’t tell you how refreshing it is to hear from someone who wants to take steps now, while they’re still in school, to build the most positive credit history possible. Your desire to use credit to your advantage will not only help you build a healthy financial future today but will also help you avoid that mountain of unsecured debt that so many of your peers graduate with.
As you have just started university, I think it’s best to relate your question back to your education. The easiest way to describe your credit report is to compare it to your mid-term or year-end grade report. Consider it a report card for your debt history that lists your personal information, creditors, credit account balances and inquiries for new credit, the credit report demonstrates how well you have kept up with your debt payments and obligations.
If you have a good history of paying your debts on time (and in full) you will receive positive I (Installment loan), O (Open credit) or R (Revolving credit) remarks on your credit report – I1, O1 and R1 are the most desirable. However, if you have a history of paying late or avoiding your debt responsibilities those rating numbers will increase, which in turn indicates that you are a credit risk.
The other number associated with your personal credit history is your credit score. While your credit report is similar to a report card, consider your credit score to be akin to your GPA. Essentially, this number takes into account your payment history, amounts owed, length of time you’ve had credit, the number of new credit applications you have made and the types of credit you used – which creates a snapshot of your credit history.
It is this number that tells lenders how much of a credit risk you will be.
Lenders use credit scores to help decide whether to issue a new account or loan, raise the credit limit on an existing account or event to decide what interest rate you will pay on a new or existing credit account.
As you have just obtained your first credit card, you will not have a great deal of credit history – which means you are in the perfect position to begin building a positive credit score.
While some of these tips may seem obvious, practicing them all will help you make the most out of this unique opportunity to build a solid financial future:
- Pay your bills on time – The largest part of your credit score is based on your payment history. Get a system in place that suits your student lifestyle to make sure you don’t forget any due dates.
- Keep balances low – Your balance is the second biggest factor affecting your score. Don’t charge anything that you do not have the means to pay for.
- Check your reports and dispute any errors – Up to 25 percent of credit reports have errors; yours may too. Disputing negative errors can boost your score.
- Keep this account for as long as possible – Length of credit history is another important factor. Don’t close your older accounts if possible. Add new accounts if you like, but don’t automatically close your older ones when you do. Doing so can cause you to lose points for having new inquiries, adding new credit, and having a shorter history.
- Use more than one type of credit – Open a variety (but not too many) of accounts to show that you can manage credit cards, retail accounts, installment loans, and other types of credit.
Successfully learning how to manage your money (and your credit) now, can go a long way towards avoiding future problems with debt. I think you are well on your way to taking control of your finances, but recommend reading Budgeting 101: Your Money Guide for Getting Through School. This free publication is a great tool to help you successfully manage your money and avoid too much debt.
Jeffrey Schwartz
Executive Director
Jeffrey Schwartz is the Executive Director of Consolidated Credit Canada and Former President of the Credit Association of Greater Toronto (CAGT).
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