Teaching Students About Credit Scores and Credit Reports

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Within the personal financial literacy curriculum there is an emphasis on understanding credit. For students under the age 17 understanding concepts such as credit scores and credit reports can be a tall order. The main reason for this is because individuals under the age of 17 don’t have readily available access to their credit reports.

Experian, Equifax and TransUnion generally do not allow access of credit reports for individuals under 17. An article (here) claims that anyone under the age of obtainable credit (18) shouldn’t have a credit report & if they do it is because someone has committed identity theft against them. Despite the articles claim that there were different age restrictions regarding each credit firm we could not locate such information.

At this point the only thing students are taking into account is the fact that they have access to their credit report for free once a year at https://www.annualcreditreport.com/ but we’ll offer more info for them here.

The first important information is a credit score. Experian, Equifax and TransUnion will all likely have different credit scores regarding your particular credit, so most pay attention to FICO credit scores and VantageScore (which is a combination of the big three using the same criteria).

First, there is the FICO credit score. For future individual credit card holders it should be noted that now nearly all credit card companies are providing FICO score information on their monthly statements or providing access to this information through your online account, as everyone continues to work together to provide more knowledge! The FICO credit score breaks down as follows:

As is always the case with credit there is an emphasis placed on payment history and amount of money owed. This is why individuals with excess debt and individuals who don’t pay bills on time struggle to obtain new credit. It should be noted that the calculations vary dependent on what is found within a credit report. In other words the credit report of individual who is 19 with limited credit history will be far different than that of an individual who is 55 with a long credit history.

What do these things mean? Payment history: Do you pay your bills on time? Are you constantly in arrears? Are you in default? Amounts owed: Individuals with credit have a “ceiling” on their credit. For example, if you have a credit card with a $3,000 limit and that is your only credit your “ceiling” is $3,000. If you are using a low amount of that “ceiling” you are in good shape, but as you close in on usage of your “ceiling” it may be a red flag to future lenders. Length of credit history: Simply an average of all open accounts. If you have 4 accounts: one opened a year ago, one opened two years ago and the other two opened five years ago then it presents itself as an average length of 3 years and 3 months (13 years divided by 4). New credit: Credit scores take into account how often you are trying to obtain credit by creating a hard inquiry (ie applying for a loan, a credit card, a mortgage, etc.). Applying for too much credit in too short a period of time can negatively impact your credit. Types of credit: This factor takes into account the different types of credit you’ve taken out (student loans, credit cards, mortgages, etc.) and also takes into account the number of accounts you have open.

FICO scores range from 300 to 850. Those with minimal credit can have a FICO score near the top of this range that changes promptly once more credit is introduced.

The VantageScore is somewhat different. VantageScore uses the same model with each of the big three: Equifax, Experian and TransUnion, but can still differ based on the firm due to what each firm reports on its credit report (it may differ). While FICO score is based on everything on the credit report the VantageScore only takes into account the last 24 months. So your FICO score and VantageScore can be substantially different. A VantageScore can range from 501 to 990 with grades associated: A for 901 to 990, B for 801 to 900, C for 701-800, D for 601 to 700 and F for 501 to 600. These grades are presented in the same way a bond grade is presented where F is high risk and A is limited/no risk. The VantageScore focuses on the following six criterion: payment history, credit utilization, balances, depth of credit, recent credit and available credit.

When discussing credit it is important to stress keeping on top of your credit. I’ve used Credit Karma for some time and believe it is the best free feature for seeing a visual of your credit score/credit performance. Credit Karma also provides more information to you regarding how credit scores are actually determined. Credit Karma provides a “credit report card” to help you understand what aspects of your credit can be impacted based on what you do.

CREDIT CARD UTILIZATION: This factor has a HIGH impact on your credit score

creditcardutilization

What this graph means is that the less usage of your credit limits the better your score will likely be. An A is signified as 1 to 20% because the common thinking is that if you’ve taken out credit you need to be using it, but you shouldn’t overuse it. This is why 0% credit utilization is a C.

PAYMENT HISTORY: This factor has a HIGH impact on your credit score

paymenthistory

What this means, is exactly what you think it means – companies want to be paid on time, all the time. Companies are now more and more understanding that life happens with individuals and generally offer some kind of grace period, usually around 10 to 15 days before they will report a payment as late to the credit bureaus. Paying late is a sign of risk to future credit providers. Late payments of substantial length will remain on your credit report for 7 years.

DEROGATORY MARKS: This factor has a HIGH impact on your credit score

derogatorymarks

Derogatory marks are considered to be accounts in collections, bankruptcies, judgments or liens against you. This is usually why individuals will try to pay their bills even if they’re late to avoid collections and why bankruptcies are considered a last resort – as they can severely tarnish your credit. Derogatory marks can stay on your credit report for up to 15 years.

Age of Credit History: This factor has a MEDIUM impact on your credit score

ageofcredit

As noted an average of the length of your credit accounts age are taken. This means every time you open a new line of credit your average account age goes down. This is why individuals may suggest paying off student loans based on usually agreed to terms (10 years in most cases) is a good idea to keep the average account age high. Closed accounts will remain on your credit report for generally 7 years.

TOTAL ACCOUNTS: This factor has a LOW impact on your credit score

totalaccounts

Some individuals may not understand why a larger amount of total accounts is considered a good thing when it comes to credit scoring, but it should make sense. Look at it this way, the more accounts you have on your credit report the more in depth an idea future lenders can obtain as to how you will pay regarding their credit. For example, a college is going to have a better understanding of you as a student after your junior year when you’ve had 24 courses than they will after your freshman year where you’ve had only 8 courses!

CREDIT INQUIRIES: This factor has a LOW impact on your credit score

inquiries

The idea when it comes to credit inquiries is that once you’ve acquired “as much credit as is needed” to stop inquiring about more. Reality is we’re all looking for more credit, but it is important to understand how future credit providers look at inquiries. For example, a high number of recent credit inquiries raises red flags to providers because it makes you seem desperate, which suggests you’re a high risk. It is important to note that these inquiries are only that of the “hard” variety which means you provided information necessary to signup for credit. Soft inquiries such as you obtaining your own credit and what credit providers will do to send you “pre-approved information” do not count in this regard, but will be visible on your credit report. It is suggested that after a year an inquiry has less of an impact on your score and after two years “disappears.” When accessing your credit report it will specifically note when inquiries will no longer be a factor.

It is important to note in closing that credit scores will vary over the course of a year depending on actions taken by the individual. It is generally a good idea to research strategies to obtain a perfect credit score. In particular to students it is important to note that credit errors now can impact you in the future, so if you’re struggling to match your credit bills to seek additional help.

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