Student credit: What is a FICO credit score?

2006-01-19

When you apply for a credit or a loan, regardless whether you are a student or have finished school, the lender will look a several factors in order to try to determine how risky it is to lend you money. Most lenders look a several factors, such as your current income, your present and previous employments and your savings. They will also look at your credit score, and today the credit score is one of the most important factors when applying for a credit.

So, why do you need to know this when you are still a student and certainly not planning to buy a house or lend money for an expensive car? Well, your time as a student is actually a very good time to build a good credit history. Unfortunately, many students also wreck their credit score while in school by using their student credit cards irresponsibly or not paying other bills in time, such as telephone, Internet and pager costs.

Maybe you have heard the abbreviation FICO or FICO score when talking about student credit score and student credit debts? FICO is a credit score system developed by Fair Isaac Corporation. Fair Isaac Corporation invented a way of calculating credit risks for individuals and the Fair Isaac system is one of the most widely used credit risk score models today. All credit scores, not just the FICO, are based on a numeric computation of the data found in your credit report. Until 2001, lenders were reluctant to tell you your actual credit score, but today you are entitled to see your own FICO score.

So, how can you improve your FICO score while still in school? Well, one of the best ways is to get a credit card and use it wisely. A responsibly managed student credit card will have a big effect on your on your FICO score. A student credit card is a good way of building a credit history. Without a credit history you have no credit score, so applying for a student credit card or student loans can actually be a good financial strategy as long as you use it cleverly. Your payment history will affect your FICO score, and any late bills or non-paid bills will lower your FICO score. Your aim should always be to keep your FICO score as high as possible. You also need to consider what kind of student credit card you wish to apply for.

Basically, there are two types of credit cards available for your: secured credit cards and non-secured credit cards. A secured credit card requires a deposit, and you will usually not be allowed to use more money than the deposit sum. Many secured credit cards also require you to pay the balance in full every month. A secured credit card will not affect increase your FICO score as strongly as a normal credit card. On the other hand, as a student with low income you might not be able to receive a normal credit card with good conditions. A secured student credit card can therefore still be a very good first student credit card for you. If you manage your secured student credit card in a responsible way, the credit card company might even issue you a normal credit card later.

Naturally, other factors than those mentioned above will also affect your FICO score. The lender will also look at the amount of money you already own and how much credit you have left on each credit card. Having maxed out all your credits is of course a bad sign. Many people are however unaware of the fact that even unused credit can count against them. A large open credit means that you could potentially be in much deeper debt within just a few days, and you are therefore considered a more risky customer. Bankruptcy will of course also decrease your FICO score dramatically and the score will usually take many years to recover.

Requests for new credits can also have a negative impact your FICO score, regardless of whether they are accepted or denied. If you have filled in many applications during a short period of time, for example when you are shopping around for a new credit, some companies will understand this and consider it less important. You can however not count on this, and you should therefore only apply for loans and credits that you are serious about.

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