Newsletter: February, 2009

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Credit is Critical

Somewhere out there, someone is keeping tabs on you–watching how you use your credit cards, whether you pay your bills on time, and more…and they’re keeping score! It’s called yourcredit score. What it means and how it affects you are things every Biz Kid should know.

Fast Fact

FICO stands for Fair Isaac Corporation, the company that developed the models on which most credit scores are based. It was started by engineer Bill Fair and mathematician Earl Isaac in 1958. Can you guess how much they invested to start this game-changing company? Scroll down to find out!

What’s the Score?

Most scores based on the FICO model range from 350 to 850. A high score means that you are more likely to repay debts. If you have a high score, lenders are more likely to loan you money and lend it at lower interest rates. If you have a low score, borrowing will cost you more–or you might not get the credit at all.

Why All the Fuss?

Way back in the day, bankers used to sit down and talk with people who were applying for credit. The bank would make individual decisions on each loan application. That’s a friendly way to do it, but it’s very slow and very expensive. Credit scores compress lots of information about your crediworthiness into a simple number.

Keep Tabs on Your Credit
You are entitled by law to a free credit report annually from each of the three major credit scoring agencies (Equifax, TransUnion, and Experian). You can get it here:https://www.annualcreditreport.com/

Make Sure Your Credit Report is Accurate

So much data goes through these companies that they often make mistakes which can lower your score. If you find errors on your credit report, you can dispute them. Here’s a link that tells you how:

http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm

Getting Your Credit Score

The agenices don’t have to give you a credit score for free. Some will give you a peek if you sign up for a “free trial” of their score monitoring services. They’ll charge you if you don’t cancel the account.

One site has started to offer free credit scores from TransUnion in exchange for showing you ads. It’s a great way to get started with understanding and monitoring your score:

http://www.creditkarma.com

High Score!

Here are the top ways you can raise your score as high as possible:

Do get some credit to start establishing your score. You don’t have to use it–but the longer you have it, the better your score will be.
Do keep up with payments. If your debts are sent to a collection agency, it can lower your score.
Do keep old credit card accounts open–even if you don’t want to use them anymore. Pay off the balances and cut up the cards, but don’t close the accounts. The longer you’ve had the credit, the better it is for your score.
Don’t open accounts if you don’t need them. Since lenders consider older accounts to be better, lots of new accounts can drag down your score.
Don’t max out your cards. If you use more than 30% or so of your available credit, it can really reduce your score.
Don’t apply for cards or loans you don’t need. Too many applications negatively affect your score.

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Ask John Paul
Q: Why should I care about my credit score?
A: Your credit score is like a real-life report card. It can make all the difference in getting a good insurance rate, getting a home or car, or even in getting a job. The most important way to have a high GPA on this report card is through paying off all your debts promptly. In school, it might take 7 good test grades to get your GPA up. For your credit score, it takes seven years for a late payment to fall off your report!
John Paul Pigéon is a 12-year-old financial guru from Fort Worth, Texas who helps kids learn about money and business. Visit his Web site at http://www.johnpaulpigeon.com. Send your question to askjohnpaul@bizkids.com. It may be selected for our next newsletter!Fast Fact Answer
Fair and Isaac invested $400 each. The company is now worth about $500 million. Click here to learn more about the history of Fair Isaac.