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Credit Score can be really confusing, especially for young students who haven’t been on the financial market before and are just taking their first steps on this complicated world. In order to understand what they’ll be facing, here are some basics on how FICO scoring and student debt work together.
Lenders will use a variety of information to calculate your credit score. Most use the FICO scoring method. FICO scores are calculated from a variety of information in your credit report. This information score can be grouped into five categories all of which need to be considered separately and then added up:
Payment History
Whether you've paid your bills on time accounts for 35 percent of your FICO score. Payment history information that is considered includes delinquencies, how long accounts were delinquent until you caught up, bankruptcies, judgments, liens or any other public financial disclosures.
The importance of paying on time is thus enormous, the percentage on which it affects your score determines that too many late payments can destroy your ability to get finance by dropping your credit score to a excessively low level. However, this can be recovered by showing a good credit behavior and paying on time for at least 6 consecutive months.
Overall Debt: Amounts Owed
How much money you owe accounts for 30 percent of your credit score. This includes how much available credit you have, how close you are to the limits on your current accounts and how many credit lines are available to you. Having no credit is bad, but having too much credit available can be an obstacle too if you want to get a particular loan.
If you have too many credit cards, the credit limits added up can account for thousands of dollars. Lenders will consider this to be probable debt and will add it to your current loans and other debt. Too much debt can determine that you’ll be declined for a loan so if you don’t use the credit cards or if you could do with only one or two, you may want to get rid of the rest.
Length of Credit History
The amount of time you've had credit counts 15 percent toward your credit score. This includes how long it has been since you've used accounts that carry no balances. That’s why early credit building is so important. Having no credit can be worst than having bad credit. So if you recently acquired a credit card or opened a bank account you’ll need to wait some time before you can request a loan.
Other Factors
Any new credit that you are seeking is 10 percent of your total credit score. It also includes re-establishment of payment on delinquencies. So make sure only to request a loan if you really need it and if you are positive that you’ll get approved. The types of Credit used, the kinds of accounts you have – revolving credit, secured bank loans, mortgage loan, car payment – are considered as 10 percent of the total score.
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