Let's Get (Cred)It On

a.k.a Man, FICO That!

Your parents probably never sat down and talked with you about it. More likely, you learned about it through overheard stories, or as something strange discussed on TV. You might have gotten a little of it during high school, but you probably got some almost immediately after you set foot on this campus. And you want some more, but you have no idea how to get it.

I'm not talking about sex; your eighth-grade gym teacher did that for you, I hope. I'm talking about credit, that abstract concept that puts Visa and MasterCard in your pocket, lets you buy stuff you can't pay for right away, and, if you're not careful, brings collection agents to your doorstep.

Admittedly, credit is much less fun than sex, but like sex, college students have more trouble with it than almost anyone. A recent Diamondback article ("Nearly half of college seniors in heavy debt," Feb. 22) reported that almost half of all college seniors carry more than $12,000 in credit card debt. Not only is that a tough hole to try to climb out of when you graduate, but it can hurt you right now if you try to get a car note, rent an apartment, or even renew those student assistance loans, and it can have effects that linger for years.

The university's response to this situation has been not to educate us about credit but to cut off credit card companies' access to the campus ("Credit card companies locked out," Feb. 22), which is sort of like teaching your child not to touch a hot saucepan by throwing out your stove. College students need credit, because they often live on small, fixed incomes; they just need to manage their credit more effectively. So, for the rest of this column, I will forego my usual pontificating and get down to the nitty-gritty of what credit is, how it is determined, and (most important) how you can get more of it.

When credit-card companies, landlords, and banks want to know how much of a risk they face when doing business with you, they consult a three-digit score provided by Fair, Isaac and Co. that summarizes your credit-worthiness; this is known as a FICO score due to the financial services industry's acronym fetish. FICO scores range from 300 to 850; higher is better, 725 is about average, and anything below 620 is a red flag for your potential creditors.

Though Fair, Isaac is not interested in releasing the actual formula, seeing as how it makes an insane amount of money renting said formula, it has told us the factors that go into generating your score:

1) Whether you pay your debts on time. Despite its seeming overriding importance, only 35% or so of your credit score is based on this, because 60-65% of people with credit reports never pay their debts late. More data is needed to differentiate. So, get that rent check in on the first of the month, but don't assume that you're out of the woods if you do.

2) How much debt you're carrying. The classic bugaboo. About 30% of the FICO score is based on this metric. The kind of debt is important, too; a home loans is fine debt to carry, in the FICO scheme, while credit card debt is bad, particularly when you're near your maximum. (Note that credit is not based on income; you can make serious money and still have terrible credit.)

3) How established your credit is. We're all screwed out of 15% of our score on this one, unless you've had a credit card on which you never ran a balance since you learned about sex from your gym teacher in eighth grade.

4) How much debt you've taken on recently. This is 10% of your score. This also covers how much credit you've tried to get recently, e.g., if you've applied for a bunch of credit cards. (Fair, Isaac says that it can tell if you're shopping for interest rates on a credit card, and we pretty much have to trust it.)

5) What kinds of credit you have, and how many accounts you have open. Again, college students tend not to have the installment loans FICO likes to see, and thus get screwed out of another 10%.

Fair, Isaac would like to note that even just opening new accounts without using them and closing them can lower your score. The clear message here is: No matter how depleted your wardrobe is, do not go around signing up for credit cards to get free T-shirts. One apparel-driven application a year or so is probably okay, but a bunch will affect #2, #4 and #5, for a potential hammering on 50% of your FICO score. Buying the T-shirt, in the long run, will probably cost you less money.

Of course, the problem for most people is that they don't close the accounts opened for sartorial purposes, and end up with forbidding three- or four-digit balances staring back at them from invoice slips. I cannot emphasize this enough: You need to pay these balances as soon as possible.

Most banks now offer various interest rates for loans, based on the applicant's credit score; in Maryland, the difference between the interest paid over the life of a $150,000, 30-year, fixed-rate mortgage (a standard home loan) for someone with a FICO score of 720 and someone with a 550 will be about $130,000. On a $150,000 loan. And if you buy a home within the next few years, they're going to evaluate you partly on your collegiate record, no matter if you become a conscientious debt payer immediately after graduation.

Actually, credit is more like sex than I had realized: You need to get some if you can, but know the risks and be safe. (The Web, of course, has a ton of info on this subject.) Most of all, recognize the importance of what you do with your credit. Cash rules everything around me, but credit is one of the powers behind the throne.

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