Biz 101: Understanding Your Credit Score

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Prof. John DeSpagna
Campus News

Did you know that when you apply for a car loan, try to rent an apartment or apply for your first real job out of college, these organizations are going to check your credit. What is your credit score and why is this so important? How can you check up on this?

How does someone find out if you are a reliable person to rent an apartment to? I am also a landlord and whenever I go through the process of renting a property, I always do a credit check to see if this person is probably going to pay their rent each month. I look for a credit score of over 700 and have never had an issue with anyone with a credit score above this level.

Lets take a look as to how this all works and how to establish your credit.

Your credit score is calculated using software from a company called Fair Isaac and this creates what is know as your FICO or credit score. A number of factors go into calculating your credit score such as the amounts you owe, your history of payments, late payments and available credit you actually utilize. You need to make your payments on time!

Click image to order!
Click image to order!

To establish credit, apply for a credit card with a small dollar limit. You can contact the bank that you have a relationship with or contact one of the major credit card companies. I remember receiving an offer from a credit card company my freshmen year of college. Not knowing what to do, I asked my father. His advice was to fill out the application to get started with establishing credit. He advised me to make at least one purchase a month on the credit card and then pay it off in full each month to show that I was reliable and creditworthy.

A year later, I received a credit card offer from American Express and wondered how that happened. It was explained to me that American Express checked my credit and extended the credit card offer to me. I still have that credit card today. My suggestion would be to do the same with your first credit card to establish your credit.

If you start to build up a balance on your credit card, don’t worry. Just make sure that you pay the minimum balance each month and do not fall behind. The credit card companies want you to make the minimum payment and do not mind charging you interest on the balance that you are carrying.

You have now started to build your credit and want to maintain a high credit score. This will help you when you go to buy a car or when you apply for a mortgage. The higher your credit score, the lower the interest rate you pay and the more money you will save on your monthly payments.

Lets now take a look at your credit scores. The three main companies that record your credit scores are Transunion, Equifax and Experian. When you have someone check your credit, they will get the credit score from each of these companies. The three scores are usually pretty similar. A persons credit score usually ranges between 340 and 850 with the higher the credit score, the better. The average credit score is 695 and about 40% of the scores are below 700 and 60% of the scores are above 700.

To obtain your credit score, it is very simple. Contact one of the three companies listed above or contact your bank. Many banks also offer a credit monitoring service where they will alert you of any changes in your credit, inquiries made and you can check your credit score at any time. These types of services will probably be done for some type of charge.

Lets get on track and develop a strong credit score, which is only going to help you in the future. Pay your bills on time, don’t apply for too much credit in a short period of time and don’t max out on your credit lines.

Your credit score tells others if you are a reliable person!

spanollo-copyJohn DeSpagna is a business professor at Nassau Community College in Garden City, New York.

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