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What is a Credit Score?

 Vince Bellino ’15, Financial Editor, Rico Altema ’15, Staff Writer 

The essence of a credit score is to identify the potential risk of lending money to consumers based on their credit report. Credit reputation provides a record of past borrowing and repayment, including information about bankruptcy or any late payments. The Fair Isaac Corporation, better known as FICO is one of the most popular credit scores throughout the United States. A FICO score encapsulates five important components from a credit report: payment history, amounts owed, length of credit history, new credit, and type of credit used. Each of the categories carries a different weight of importance depending on their history. A FICO credit score ranges from 300 to 850 where 650 is the typical threshold for good credit with the ability to pay off debt. A lower credit score allows banks to lend money at higher interest rates to mitigate risk of default. So, it is in the best interest for individuals to obtain the highest credit score possible so they get lower interest rates.

The subprime mortgage crisis in 2008 was partially caused by the allowance for less stringent credit requirements. This allowed for individuals to obtain credit, loans, or a mortgage regardless of their credit score. So, a family with the inability to make payments on their outstanding credit card debt was still able to finance their costs with more debt. Eventually, when families across the United States were no longer able to make their payments, they began to file for bankruptcy. Therefore, banks and lenders lacked the ability to provide new financing and in such caused a systematic credit freeze. As prudent students, it is important to be cognizant of any outstanding liabilities and make payments on time. A late payment reduces one’s credit score, which restricts future borrowing. So in conclusion, a credit score acts as a proxy for one’s credit worthiness and it is in the best interest of students to begin building their credit scores now for future endeavors.

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