Student Investment Expert’s Tip of the Month – February

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In this market, having good credit and good personal finance is even more important than in normal times. Without good credit, you aren’t just paying a higher interest rate on your loans; you can’t even get a loan. Having good credit is the only way to ensure you can take advantage of opportunities when they present themselves – buying a new house, taking advantage of cheap financing on cars, etc.

What is your credit score?
Your credit score is used by banks and lenders to determine whether or not to lend your money. There are five main factors in determining your score.

Payment History – The most important factor. It looks at how well you have repaid your previous loans and obligations.

Amounts Owed – The less money you owe your creditors the better. If you owe too much money to other people, banks may be less inclined to lend to you since you have too much debt.

Types of Credit In Use – The more diversified the types of credit you have the higher your score will be. If you only have credit cards as the kinds of credit you have, your score will be lower than if you have credit cards, a car loan, and a mortgage.

New Credit – If you open up too many lines of credit or credit card accounts in too short of a time, your credit score will go down.

Length of Credit – The longer you have a credit history the higher your score will be. It shows you can responsibly manage your credit over long periods of time.

What is the range of credit scores?
According to Fair Isaac, more commonly referred to as FICO, the average credit score in the United States is 723 on a scale of 850. Fair Isaac is the main credit-scoring model that most all creditors use; here is their credit-scoring breakdown:

750 to 850 – Excellent. Lenders will have no problems giving you a loan with a credit score of 750 or above.

700 to 750 – Very good to excellent category. This is normally a very good credit score, but in this environment, even a score like this can make it difficult to get a loan.

680 to 699 – This credit score puts you in the “Good” category. Under 700, you start to pay higher interest rates and get more unfavorable terms on loans.

620 to 679 – If your credit score falls into this range, you fall into the “Okay” category. The closer your score is to 679, the better. 620 is consider to be a “par” credit rating and you may be required to provide supporting information such as additional income statements, personal and professional references as well as documentation confirming time at your current job.

580 to 619 – While you aren’t in the “Bad” category yet, you are teetering on the edge if your credit score falls in this range. 620 is the prime rate cut-off, so plan on paying a higher interest rate. Technically, the start of ‘subprime.’

500 to 580 – You can still get credit in this scoring range, but expect to pay a very high interest rate and look closely at the terms of your agreement. Closely examine how your interest rate is calculated. Some predatory lenders will charge interest rates on car loans that are calculated like credit cards, on a daily average balance. If you see these words in your disclosures for a car loan, put the pen down and walk away.

499 and below – Yes, even with as score of 499 or below you can still be extended credit, but the interest rates will kill you financially. Take a year or two to pay off your collections or bad debt, clean up your credit and reapply at a later date.

What are the implications of bad credit?
If you have bad credit, chances are you are paying high interest payments on some loan you haven’t paid off yet. You are probably paying high interest to a car loan or credit card that you haven’t fully paid off yet or are slightly behind on.

Second, in addition to paying high interest payments, every loan you get thereafter will be on worse terms with higher interest rates. If you have a bad credit score, you will continually pay for it. If every loan you get is higher because of your score, you are paying thousands of dollars more each year for the same loans.

Having bad credit not only costs you money on the interest payments on the original loans that are causing you to have bad credit in the first place, but are also costing money on each subsequent loan you get for your house or your car. Having good credit is extremely important and will save you money!

~ Monte Malhotra, Student Investment Expert, Campus Calm

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