The Financial Ups and Downs of Credit

Illustration by Maeghan McKenzie

Credit is a rather abstract concept. Many students have credit cards, but the process money goes through after being spent on one is relatively unknown.

The world of credit extends much beyond credit cards, and is a topic worth exploring if you’re interested in having a strong financial future.

What Is Credit?

Elizabeth Ferrari is a second year Accounting student. She previously studied personal financial literacy as a member of the Distributive Education Clubs of America.

“[Credit] is referring to the lending or borrowing of money for a consumer to purchase goods and services now but pay for them later,” she described.

“[Credit] is referring to the lending or borrowing of money for a consumer to purchase goods and services now but pay for them later."

Basically, credit is a contractual agreement between a borrower and a lender. They give you the money you need now, and at some point — under some agreed upon terms — you pay them back.

Credit comes in a variety of different types. The two main types are installment and revolving credit.

Installment credit is a loan for a specific sum of money that a borrower agrees to repay, with interest and fees, in the form of monthly payments.

Revolving credit, the other most common form of credit, is also known as the credit card.

Zac Broekhuizen is the branch manager of the Advantage Federal Credit Union on campus.

“Credit cards are using a line of credit to make purchases, getting a monthly bill and then making payments every month," he said.

These forms of credit make up so much of our day-to-day financial life. This is why it’s important to examine the behind-the-scenes aspects of credit and how it affects borrowers.

How Is Credit Built?

Before lending money to a borrower, the lender needs some sort of way to determine whether or not they can trust the borrower to pay back the money they are lent.

This is where credit history, credit reports and credit scores come in.

“Credit history is a record of how you’ve managed your credit in the past,” Ferrari said.

A borrower’s credit history is distilled into their credit report, which is more or less a report card of their financial life. Borrowers should check their credit report frequently. There are three major credit reporting bureaus, and borrowers can pull their credit report from each of them once a year.

Sharon Kompalla-Porter is the chair of the RIT Financial Literacy team under the Office of Financial Aid and Scholarships. Part of her job is helping students understand how they can use given systems to their advantage.

“If you time it right, you can, every four months, get a free report from one of the credit agencies,” Kompalla-Porter said.

It is important, as a borrower, to make sure all three of the agencies are being checked. Each agency’s report will look slightly different due to the way they pull information, and if a borrower finds errors within any of them, they are within their rights to get them corrected.

Finally, there are credit scores.

“Your credit score is all of your financial information combined into one three-digit number,” Ferrari said.

Credit scores are what lenders use when determining whether or not to lend money to someone. There are also options for borrowers to check their credit score, but they should be wary of what they use to do so.

“When it comes to tools like Credit Karma, they are only really good for monitoring your general trend, whether your score is increasing or decreasing,” Broekhuizen said.

Various different scoring models are used to determine credit scores, and the app or site you check may not be using the same model as your bank or credit union.

A borrower’s credit score is extremely important though, as it can have both positive and negative impacts on their life. A good credit score can mean lower interest rates on loans and higher spending limits on credit cards, while a bad credit score can make it difficult to make big purchases, such as cars or houses, that require credit of some sort.

Even more so, a person’s credit score, for better or worse, is used by many as an indicator of personal responsibility.

“Prospective employers may even look at your credit, and if you have a poor score, they may make a different hiring decision when comparing two candidates,” Kompalla-Porter said.

Building Your Financial Future

Credit is a system that’s here to stay, so how can people — especially students — make the most of it?

First of all, they need to make sure they’ve started building credit. No credit can be just as damaging as bad credit. Just like with bad credit, no credit is an issue of trustworthiness.

Most students have some form of student loans, but it would also be good to think about getting a credit card. Just one should be good to start with, and there are plenty of options specifically tailored for students' needs, so researching these options is also a good idea.

Getting the card is just the first step though. Once you have one, you should make sure you are fiscally responsible with it.

“If you charge your credit card, make sure you are paying that off in full, not just the minimum. If you’re paying the minimum, it can accumulate much faster than you might think,” Ferrari said.

Really, responsibility is the key word. Having credit complicates a borrower’s financial life. Once a borrower starts using credit, they are no longer handling just their own money. They are now liable for someone else’s too, and there are long-term consequences to mismanagement.

“It takes a decent amount of time and a lot of discipline to get yourself to the point where you have good to excellent credit, and it only takes one missed payment to set you back,” Broekhuizen said.

“It takes a decent amount of time and a lot of discipline to get yourself to the point where you have good to excellent credit ... ”

And as a student, it can be especially hard to imagine the consequences of financial mismanagement. After all, college is supposed to be a time for making mistakes and improving oneself. Credit just isn’t as forgiving though.