Keeping Score

Know your credit score!

Last week I was conducting one of my Personal Finance seminars and had a number of questions from students regarding credit scores, why they are important and how they are determined. Though too complex a topic to tackle in a blog post, I do think it’s important to understand why these scores are important to college students and what you can do to both monitor and improve your score.

First, to the issue of why they are important, we live in a credit society in which much of the commerce that occurs in our everyday lives comes as a result of borrowing. Our house or car payment is an easy example, as are student loans or filling our gas tank using a credit card at the pump. Credit scores impact our borrowing in several important ways. First and most obvious, our credit score serves as a measure of whether or not we are deemed qualified to borrow at all. In the most simplistic terms, just ask yourself if you would loan money to someone whose credit history clearly tells you he has had problems repaying others in the past. Enough said.

But credit scores also establish the relative degree of risk a borrower represents on a continuum of not risky at all to very risky, all based on formulas and algorithms created by credit reporting agencies, the three most prominent being Equifax, TransUnion and Experian. Data from these companies is then compiled under a proprietary algorithm and formula developed by the Fair Isaac Corporation, which yields the now ubiquitous FICO score, the most widely used single-number credit score.

Naturally, credit ratings are established using a variety of measures regarding an individual’s behavior in using credit responsibly. In order to understand the factors that impact your credit score, I can recommend a few good resources. But under no circumstances should you ever visit FreeCreditReport.com – just don’t do it! You’ll get signed up for services you don’t need, not to mention lousy rock music. Instead, I strongly recommend AnnualCreditReport.com, which is the official site maintained by the three major credit reporting agencies noted above. Take the time to become familiar with how scores are determined, and use the site to get your credit history from each of the three agencies once a year for free. You can actually do it online and, once again, it is absolutely free. Also I should note that when you check your own credit in this manner, there is no negative impact on your score, as there would be when others are checking on you in response to an application for credit.

Finally, a recent article regarding credit scores provides a few insights into things that impact your score. Use credit wisely and watch you score improve over time!

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