Financial Literacy 101: Credit Scores

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Financial Literacy 101: Credit Scores

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COLBY WEBER, Staff Writer

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Financial literacy is a skill that plays a key role in any college student’s life. Managing your finances is an essential part of setting yourself up for a successful future. In order to accomplish this, students must learn about the various aspects that play into money management. Understanding what credit is and how you can increase your credit score is a key element in gaining proficiency in financial literacy.

“Credit is a numerical value that is assigned to your ability to borrow debt,” said Kyle Vic, branch manager at Hy-Vee Wilson Avenue. “It’s a reflection of your ability to repay a debt.”

This value is commonly measured with a figure called your FICO score. However, one can also get scores from three different credit bureaus. These include Trans-Union, Equifax and Experian. FICO scores can range from 300 to 850; the higher the number, the better one’s credit rating is.

A person’s credit score can be separated into tiers. For example, a credit score within a certain range can get you a specific rate on an automobile loan. With a higher credit rating, it’s possible to get a better deal. According to Vic, a score in the 700 range is ideal.

Even though people may know what credit is, they may not know how to build it.

“The biggest thing is taking out loans or having a credit card,” Vic said. “Paying your bills on time also helps. You have to take out debt to build credit.”

Vic emphasized the importance of having a credit history. It influences your buying power for homes and cars. In fact, it can even affect your career if your credit score is checked as a part of the job interview process. When applying for loans, they may not give you a loan if your history shows that you’re unable to pay it back. With a lower score, you will also get a higher interest rate. By keeping your credit score high, you can get a lower interest rate.

Credit scores are calculated using five different parts.

“Thiry-five percent of it is payment history,” said Vic. “That’s about whether or not you’ve made your payments on time. Next is capacity at 30 percent, which is how much you’re able to borrow. If someone has $1,000 on a credit report and another person has $40,000 on a credit card, that one has more available credit. Recent debt makes up 10 percent. If your debt is more recent, it will have a larger impact on your score. Age is 15 percent of it, because newer debt has a more negative impact. The last one is a mix of debt. By diversifying your types of debt with auto loans, mortgage loans and personal loans, you can increase your score.”

There are several things that can make someone’s score drop. Missing payments, the frequency of missing payments and the severity of a missing payment can affect a person’s score. Maxing out a credit card can also be detrimental. As long as a score is kept at 50 percent or less of your credit card’s limit, it should help you to keep your credit score positive or neutral. Closing a credit card line after it has been paid off may also have negative consequences. As a final tip, make sure not to apply for loans multiple times in a row in a short amount of time.

Credit is necessary in order to buy a house or a car.

“I’ve seen people try to buy an auto loan or a home loan and having to ask their parents to cosign, sometimes they see it as disheartening. College students should know that credit is important,” Vic said. “They should go somewhere to educate themselves about financial literacy. They can go to their local bank or financial institution to take an extra step if they don’t understand.”

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