From test scores to grade point averages, it’s easy to feel like one’s value comes down to a single number during teenage years. It also happens that in your 20s, you’ll find there’s a new number in early adulthood to be wary of: your credit score.
“Credit is your reputation as a borrower. It tells others how likely you are to repay your loans,” said Tim Su, financial service officer at Cathay Bank in Bellevue. It is a number collected by credit score companies from creditors and then sold to companies who will “use it to evaluate potential clients for credit risk, employment, insurance, etc.”
Scores range from 300 to 850, and 680 to 700 is the typical minimum range banks expect for a loan approval.
“If you do not have a credit history, lenders do not know whether or not they should lend you money, you need to build credit in order to prove your creditworthiness,” Su mentioned.
For 27-year old Yin Chan, it became apparent that as a first-time home buyer, it was crucial she had good credit to be considered for a home mortgage. “When I was looking to buying a house I noticed (credit) was important because my loan officer started telling me I need at least (a score of) 680 to be considered for a loan,” said Chan.
Chan said she is looking to take advantage of the relatively low-interest rates currently, as she house hunts in the Seattle area.
For both young adults and new immigrants, both whom begin with fresh slates, there are several ways to begin building credit.
Signing up for secured credit is the first step for immigrants, said Branch Manager at Cathay Bank in Bellevue, Josephine Yang-Brenner.
She recommends that young people create joint accounts with their parents when making car purchases, for instance, to begin building their credit.
“You should establish credit in your late teens and early 20s so that it is available to you when you need it,” said Rod Griffin, director of public education of Experian, a major credit report company.
For Chan, who has worked at a local community bank since she was 19, opening a credit card wasn’t necessarily the path to building credit, but falling into a consumer trap without the proper financial education.
“I got it because my bank said we might need it, and my friends were getting it,” said Chan. “Credit card companies try to lure you by saying there is a six-month or 12-month interest-free rate. … You develop the mindset of ‘free money.’”
The bills stack higher after this duration in addition to a hefty interest rate, and this is what the credit companies want, she said.
Chan cautioned against signing up for too many department store credit cards that incentivize customers to keep spending with reward points and other promotions that make spending harder to control, and thus, more risk for bad credit. While she currently is in the process of buying a home like many other college graduates, Chan also noted that graduates who are looking for employment — especially government agency jobs — may find themselves subject to credit report checks by employers.
It’s important to stay vigilant for these reasons. Credit scores should be checked on an annual basis to make sure the information is consistent and accurate. Regularly tracking all credit records can determine identity theft or fraud before consequences increase.
As a University of Washington graduate, Chan warns other college graduates to also be careful with school loan payments. Making a payment late can affect one’s credit score and this record isn’t removed typically for seven years.
Yang-Brenner suggests visiting www.annualcreditreport.com to check one’s FICO score and to learn about how to build this number. A FICO score is the number that measures credit risk. In addition to loan history, debts, payment history and other personal information, it comprises a credit report.
Many young adults say they have a credit card for emergencies, said Griffin of Experian. But as his college economics professor put it: “Pizza and beer on a Friday night is not an emergency, but all too often seems like one.”
Chan can add her voice to the chorus, and believes it’s important to live within your means, something she learned early on as a college student. It’s a fine balance Chan has made between immediate and future desires as she faces the major adult milestone of home ownership.
“It’s a ‘do you want your purses and shoes — or your house?’ type of thing,” said Chan.