Stay in the black

Graduate without financial ruin
By CLAUDE MORGAN  |  August 26, 2009

finance main

Some of you greenhorns are embarking on your academic careers. And some of you veterans are practically outta here. Remember all that advice about maintaining a good grade-point average? There's another number that might actually be more important: your credit score.

"Your credit score may have more of a direct impact on your financial future than any degree or career you choose over the next four years," says Brett Christenson, a Texas-based consultant who offers lending advice to financial institutions nationwide.

Used to be, when the world was a much smaller place and people knew each other, that a local banker might lend you cash over a handshake or vouch for you at another lending institution. As the world became bigger and more complicated so too did the relationship between lender and borrower; namely, a lot more strangers started asking for loans. A company called Fair Isaac Corporation ("Fair" is a name, not an adjective, we're sorry to say) came up with a statistical formula to determine the creditworthiness of the multitudes, and humbly named it after its own corporate acronym. This is the so-called FICO score.

"FICO is a predictor," says Christensen. "It knows if you're heading into financial trouble or good times, and it adjusts your score accordingly." The key to your financial success, whether you're a student or a chief executive officer, says Christensen, is to establish a good payment history and maintain a good credit score. "This one number can instantly tell a lender if you know how to manage debt and act responsibly."

In other words, FICO's three-digit score — on a scale of 300 to 850 (higher is better) — is now, arguably, the single-most important report card you need to ace.

Fair Isaac is tight lipped about exactly how it crunches financial data and grinds out a credit score. But, according to the company's Web site (myFICO.com), the weight is distributed thus: 35 percent of your score reflects payment history, 30 percent goes to what you owe and how much capacity you have to borrow now, and 15 percent is given to the length of your credit history.

"Younger folks are now much more interested in learning how the FICO score works than older folks," says Christensen, who speaks to large numbers of students at university and college credit unions.

How do you get a good FICO score? Pay your bills on time, don't borrow too much as compared with your income (student loans are a notable exception to this rule), and try not to rotate between credit cards, opening and closing accounts in short succession (though you may have to if you're paying down a balance and transferring among low-interest-rate cards).

What's a good FICO score? Many Americans apparently nail scores between 750 and 799, which is pretty darn good if not excellent. Shoot for that. South of 620 is trouble.

Will a banker lend you money for, say, a new set of wheels if you have a low score? Probably. At least, someone will. But the lower your score, the higher risk the lender sees, so the higher the interest rate you'll pay.

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