The world of credit and finance can be complex and a big problem for people who don’t know the basics. What people don’t know will eventually hurt them and students are at the most risk due to the lack of basic student credit education in high school or college. As a new college student, just a few missteps and your blank credit report can suddenly be a bad credit report.

Student Credit is probably one of the most important; least understood aspects of personal finance. Credit scoring affects every major purchase in your life, from cars to schools to houses. Good credit opens doors, bad credit closes them. But what is credit, and why does it matter to you?

What is a Credit Score?

Fundamentally, your credit score is a record of how timely you are in paying back money you have borrowed. Your credit is stored as a report and a score at a credit bureau. If you get a student credit card and use it wisely, your credit score will improve.

Student Credit Cards and your Credit Score?

Credit scores are used by any organization that deals with the lending of money, from student credit cards to colleges to realties. Companies that judge risk use your credit score, such as insurance agencies. Here is a short list of company types that are known to check your credit:

• Banks & credit unions
• Employers
• Cable & telephone service companies
• Cellular and Internet service companies
• Mortgage, loan, and student credit card companies
• Colleges and private schools
• Private college loans

Student credit scores and reports even affect your employment - if your current or future job exposes you to the financial workings of the company, your employer may use your credit as a means of judging risk. Employees or candidates with poor credit may be judged to be high risks for embezzlement, and may be denied employment.

FICO credit score is now being used for insurance purposes! What does this mean for you? If your credit is less than good, your insurance costs are going to go up.

Using a student credit card - How is credit judged?

Credit scores are numerical indexes based on an algorithm developed by Fair Isaac Company, called a FICO score. Scores are negatively impacted by events such as late payment, incomplete or partial payments, defaults, and judgments or liens, and range from 300 to 850. The actual algorithm is a trade secret of Fair Isaac, but the following breakdown approximates the weighted values that compose your score.

• 35% Payment history
• 30% Outstanding debt
• 15% Length of your credit history
• 10% Recent inquiries on your credit report
• 10% Types of credit in use

The “average” credit score for “excellent” credit is 720 or better for most major lenders, such as mortgage lenders. Scores lower than 675-demand scrutiny, while scores lower than 500 will often be denied outright.

In addition to a credit score, up to four FICO “reason codes” may be included in your credit report. These reason codes explain why your credit request was approved or declined.

How do companies judge my credit?

Many companies have begun to institute automated loan decision, in which your credit score is requested from one or more credit bureaus and then matched against an arbitrary index. For example, a mortgage company may decide not to lend to any individual with a credit score less than 600. Other companies go one-step further and assign levels of risk to lower scores; a borrower with a near-perfect score may receive a much lower interest rate on a loan or purchase than a borrower with a poor score. Still others may automatically decline an application if a certain FICO reason code is included in the report.

Below is a generalized average rating of FICO scores. Most lenders look for acceptable or better scores; each lender makes a decision about what level of risk they are willing to accept.

• 720-850: Outstanding credit (”AA”)
• 700-719: Very Good credit (”A”)
• 675-699: Good credit (”B”)
• 620-674: Acceptable credit (”C”)
• 560-619: Poor credit (”D”)
• 500-560: Very poor credit (”E”)
• Below 500: No credit, credit-based applications denied outright (”F”)

These scores plus the FICO reason codes form the basis for loan decision. Keep in mind that interest rates will also vary on loans based on your credit. Someone with outstanding credit may receive a loan at interest rates up to 3% lower than someone with very poor credit.

Learn more about student credit on our school work - learn good credit pages.