Credit scores deserve another look!

Understanding Your Credit Score

I continue to get frequent questions from students regarding credit scores, including why they are important, how they are calculated and what steps students can take to improve their scores. So I have combined some elements from previous posts with another recent article on the topic. As I’ve mentioned previously, this is really much too complex a topic to handle in a blog post, but 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.

Since we live in a credit society in which much of the commerce that occurs in our everyday lives comes from borrowing, having access to credit depends in large part to our credit standing. Our monthly payment for a car loan is an easy example, or just filling our gas tank using a credit card at the pump.

Credit scores directly affect our ability to borrow money in several important ways. First, of course, our credit score serves as a measure of whether or not we are deemed qualified to borrow at all. If you’d like to know how a bank looks at you when you ask for a loan or credit card, 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. Not hardly!

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 generates your 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 again warn you NOT to 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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2 Responses to Credit scores deserve another look!

  1. KJ says:

    I have recently read about the “big three” creating a Vantage Score. This is good for people with little credit, who may have paid off all old debts and loans. I believe they called them “Thin Files.” It takes account of bills such as utility bills and other items to generate your risk factor. Now, getting institutions to accept them is a different story.

    • Ron says:

      I absolutely agree! FICO definitely doesn’t tell the whole story. And of course, none of them have any way to factor in assets and investments, since they don’t have that information.

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