Good credit scores may not be a priority for some University students, who may be more concerned with good test scores instead. In fact, for several students, credit scores represent unknown territory.
“I do not know much about credit scores,” second-year College student Michael Do said. “I would probably just ask my parents to find out.”
Despite their unfamiliarity, credit scores affect students in a myriad of ways. Fourth-year students preparing for life after graduation should keep in mind that employers, especially in the financial services industry, are interested in job applicants’ credit scores, fourth-year Commerce student Brendan Dawson said.
This does not mean that graduating students continuing their education instead of getting a job immediately do not have to be concerned, however. Credit scores are also used for the bar exam and graduate school. “You can’t sit for the bar exam if your credit history is a mess,” Personal Finance Prof. Karin Bonding said.
It is not only graduating students that must think about credit scores though, as credit scores can affect insurance premiums as well, according to the Federal Trade Commission’s Web site. “The insurance premiums [that] students are paying on cars, on houses, on medical, are all based on credit scores,” Bonding said.
There actually are several types of credit scores, but the most popular score is the FICO. Lending institutions usually ask for more information than just the FICO score, but it is arguably one of the largest components of an institution’s decision to give a loan. With the current FICO system, a score between 760 and 850 is considered perfect credit, Bonding said.
Although one can refuse to provide credit information in some cases, students nevertheless should be aware of how to establish and maintain a good credit score. But a good credit score can often be elusive because some of what goes into the FICO score is murky.
“We don’t know some of those details,” Bonding said. “I usually tell my students [that] it’s a bit like the Coca-Cola formula. It’s a secret because they like to keep it that way, and because the less they divulge, obviously, the more they can fiddle with those scores.”
Bonding noted, however, that there are some basic principles that students can follow. One principle is paying credit card bills promptly because FICO scores will be negatively affected if any payments are missed or made late.
“I pay down my credit card immediately,” second-year College student William Butler said, “so there is no lag time or late payments.”
This may be easy for some students, but missing one payment can drastically decrease a credit score by as much as 50 points. Even if students can only pay the minimum amount due at the time, Bonding emphasized that students should “always pay in full if at all possible, and within six months, you should see a better score.”
If students consistently use too much of their credit line without paying the debt, their credit scores will decrease. Though Bonding said it is acceptable to occasionally spend more than the threshold amount for large purchases, students usually should try to stay below 30 percent of their credit lines.
“Paying [your credit] down and coming back down to a more normal pattern of payment is what you want to do,” Bonding said.
A common pitfall that people run into is when they open multiple credit card accounts to either increase their available credit or to take advantage of store promotions.
“Students quite often get taken in by promotions, and that is one thing that I would say to try to stay away from,” Bonding said, even though promotions are often “very enticing.” Every time one applies for a credit card, a lender checks the applicant’s credit history, which negatively affects the credit score. She suggested students should try to limit the number of credit cards they have to four.
For students who have already opened several credit card accounts, it is unwise to panic and close unused accounts because this also negatively affects one’s credit score. This is especially true if students close older accounts because it will decrease the length of their overall credit history.
As students develop credit history, it is important to obtain a credit report at least once per year to check for mistakes and to track accounts. According to federal law, anyone can have one free credit report per year, from each of the three major credit bureaus (Equifax, TransUnion, and Experian). One also has a right to dispute any discrepancies on one’s credit report. The actual FICO score is not available without paying a fee.
For students who intend to get a loan, however, it may be a smart idea to pay the fee and find out their actual score so they can predict the amount of interest they will have to pay.
Students also should not be concerned that checking their credit history or credit score decreases their credit score. “The myth is that if I check my credit score, or I check my credit report, my score goes down immediately,” Prof. Bonding said. Rather, one’s score only goes down when students are looking to obtain new credit lines, like when one goes to a car dealer for an auto loan, she added.
Maintaining a good FICO score is important, but it is not the determining factor in whether a student will be approved for a loan. Lenders also will look at factors like income, employment and residence. A low FICO score, however, could ruin a student’s chances at getting a loan, whereas a high FICO score will make it more likely for one to take advantage of lower interest rates.
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