Understanding Your Credit Score

Recently Alpha Kappa Psi coordinated an event on Western’s campus called “How to Understand your Credit Score and How to Use a Credit Card Responsibly”. Here’s a little background to describe why I was interested in organizing this event. When I was in high school I took a class called Senior Experience that went over the importance of this topic among other useful life information such as banks versus credit unions, how to write out a check, understand loans, the pros and cons to buying a house etc.... Upon coming to Western two years ago as a freshman I was shocked to find out I was rather unique to have learned about these topics and that this mandatory class I took is not even offered at most high schools. I got my first credit card at 18 and have used it solely to build up my credit score and practice responsible spending. I was the only person I knew as a freshman to have a credit card let alone know how to use it. I feel these topics are especially important to young adults and college students starting to become independent.  This is why felt I needed to find a way to educate the students at Western about how to get started on this lifelong journey of credit awareness.

Chase Mortgage Bankers Terri Gunderson was our professional speaker who shared her expertise on the importance of credit scores and credit cards. Terri has been doing Financing for Mortgages - Both Purchases and Refinances for over 14 year and has recently been awarded the top Loan officer for Chase in Washington State for the past 3 consecutive years. Here are some basics we learned this evening.

Why is a Credit Score important?

It can affect the loans or rate you can qualify for, job opportunities, and recent studies have shown that your credit score may even determine your spouse or the life expectancy of your marriage. http://www.thestreet.com/story/12029749/1/similar-credit-scores-means-fewer-divorces.html

Your credit score Breakdown:

Your FICO credit score is calculated based on five categories: Payment History 35%, Amounts Owed 30%, Length of Credit History 15%, New Credit 10%, and Types of Credit 10%. Your credit score is essentially an algorithm that considers all of these factors and spits out a grade to demonstrate how financially responsible you are and shows lenders how likely you are to pay them back. Generally making on time payments, having a longer history, lower debt, and varied types of credit will increase your score.

Credit Scores range from 350 to 850. The higher the score the better your chances of being approved for loans

Types of Credit:

Credit cards, mortgages, car loans, student loans, furniture/appliance financial loans, retail credit cards, etc…

What with make or break my score? General overview

Good

-          Be in the habit of checking your Credit Score. Checking your score regularly (at least once a year) will keep you financially aware and potentially minimize the effects of identity fraud. These three companies: Experian, EquiFax, TransUnion, are required by law to give one free credit report each, per year. Another good resource is credikarma.com  where they will do soft credit check to give you a fairly accurate score however it does not include a full report. Routine checking of your score can also make disputing of a purchase

-          When applying for loans or any of the like, be sure to read the fine print. Generally with credit cards you want perks such as benefits, rewards, cash back, and low APR.

Bad

-          Do not spend money you DON’T HAVE.

-          Good rule of thumb: do not utilize more than 30% of your available credit. For example: if you have a credit card with a credit limit of $500, do not spend more than $150 per month using that card.

-          Do not close out old credit cards, especially if there is a balance remaining on it. The longer your history, the better your score. Try to keep your first credit card and use it once in a while. If you stop using a card all together, the issuer may stop reporting that card or not be recognized as an open account. As long as you use it at least once or twice a year you should be fine.

-          Don’t open too many lines of credit at once. Each application dings your credit score as a “hard credit inquiry”. If you apply to too many at once it makes you look financially desperate. Generally if you apply for one to three lines of credit per year spread out your credit score will have time to recover.

-          Don’t apply for lines of credit you don’t qualify for. You will most likely be rejected and receive the negative impact of a credit inquiry for nothing.

For first time credit card users: I would suggest going to CreditKarma.com and entering your info to start a profile and see your current credit score. If you go under the “Credit Cards” tab you can see a list of different credit cards and be able to compare them and see how likely you are to be accepted. You can apply directly from the links on the credit card profiles.

With this I hope you feel a little more comfortable with credit scores and credit cards. Credit cards are not scary if you know how to use them and credit scores are an unavoidable part of life. If you have any further questions I will always make myself available. Good luck with your endeavors and continue to be financially aware.