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Financial Education for Everyone

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June 1, 2007

Probably the last thing college students want to do during summer break is absorb any new information. But if you can prevail on your kids, I've got a subject that’ll provide a lifetime of A's for their financial future: Credit scores.

Most young adults have no idea what a credit score is. Yet by graduation, many will have already taken actions that could adversely affect their score for years to come. All it takes is a couple of bounced checks or late payments to make it harder to borrow money, rent an apartment or get car insurance. Students should think of their credit score as their financial GPA.

Here's a brief explanation of credit scores and why they’re important:

All three major credit bureaus – Equifax (www.equifax.com), Experian (www.experian.com) and TransUnion (www.transunion.com) – track your credit history and, at your or a potential lender’s request, will compile a credit report that’s basically a snapshot of your credit history.

You can order one free credit report a year from each bureau. (Order through www.annualcreditreport.com; otherwise you'll pay a small fee.) It’s always wise to know what’s in your reports so you can correct errors or spot fraudulent activity.

Credit bureaus use this information to create a three-digit credit score that helps lenders determine if you are a good credit risk: The higher the score, the better your credit rating. The most common are called FICO scores, named for Fair Isaac Corporation (FICO), which developed the proprietary software.

Five factors determine your FICO score: payment history, amount owed, credit history duration, newly opened credit accounts, and types of credit used. Credit scores consider information from all five categories, but may weigh it differently depending on your individual circumstances.

Your credit score may affect not only whether you qualify for a loan, but also the amount, term length and interest rate. For example, a poor credit score could add an extra $50,000 in interest payments for a typical, 30-year, $200,000 mortgage.

Many online resources explain credit reports and credit scores, including the Federal Trade Commission's site (www.ftc.gov/credit) and www.myfico.com, where you can also purchase a copy of your score to know in advance what’s being shared with lenders. Always consult a financial professional if you have questions about your particular situation.

Another valuable resource is What's My Score (www.WhatsMyScore.org), a financial literacy program run by Visa aimed at raising young adults' awareness of the importance of understanding and improving their credit scores. Among its helpful tools is a comprehensive workbook called Money 101: A Crash Course in Better Money Management, which can be downloaded for free at www.whatsmyscore.org/downloads.

The workbook includes a variety of worksheets and covers such topics as:

  • Making smart financial decisions.
  • Creating a workable budget.
  • Explanation of banking services.
  • Understanding different types of loans and credit scores.
  • Saving to reach financial goals.

If your kids need an incentive to learn more about financial literacy, how does $10,000 sound? That’s how much What's My Score will award in prizes for the best homemade videos on the importance of building and maintaining a strong credit score. Future Hollywood filmmakers have until July 31, 2007, to submit their original, 30-second videos. Go to www.WhatsMyScore.org to read contest rules and view sample videos.

Help your kids establish a strong financial future – it could be the best investment you ever make.

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This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.

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