College students should know ABCs of credit score reports

Adhvith Dhuddu, CT regular columnist

Wednesday, March 19; 12:00 AM

Here's a startling statistic: In the economies of India, China and Russia, the ratio of people to credit cards appears healthy (ranges from 1 credit card for every 20 to 50 people), but in the U.S., the equation reverses, averaging 3 to 5 credit cards per person.This clearly shows how credit-dependent we are, but also reflects the requisite nature of credit cards in an increasingly cashless economy. With this in mind, the importance of maintaining, tackling and improving your credit history and credit scores cannot be more highly stressed.

Your credit score is a financial report card outlining how you have handled debt historically, helping corporations decide how creditworthy you are. Going forward, your credit score might be much more important than you think it is. When the Facebook generation steps into corporate America, unlike in the last century, when credit scores only mattered during credit card, home and car loan applications, in the future credit scores will determine everything from how your bills for water, electricity, cable and Internet are handled to your pay structure for televisions, laptops and other accessories.

The three broad aspects to focus on are obtaining your credit score, analyzing your credit score to report errors, corrections, and finally, outlining a plan to improve your credit score.

Credit reports are compiled by three companies: TransUnion, Equifax and Experian. The information in these reports is presented differently, and these organizations also calculate their own credit scores (Equifax has ScorePower, Experian has a PLUS score and TransUnion has its VantageScore). But it's your FICO score, compiled by the Fair Isaac Company, that is the all-important number. This score is derived from the information provided in the abovementioned reports and ranges from 300 to 850.

Taking the initiative to obtain your credit report is the first step. We are permitted to obtain one free credit report in a 12-month period from each of the three agencies or from FICO. The three agencies run a Web site, www.annualcreditreport.com, where anyone can request a report. This can also be done by calling 877-322-8228. Also, if you are rejected for a loan, denied a credit card, etc., you can ask for your latest credit report for free from one of the agencies (this has to be done within 30 days of rejection).

Close to 20 percent of all credit reports contain errors that might result in you paying a higher interest rate for a loan or rejection for a home or car loan. Sometimes the consequence can be devastating, such as losing a job. So it's important to go over and check for errors, misrepresentations and typos, and alert the credit reporting agencies. These agencies are obligated to fix errors when you point them out, and although the process is time-consuming and bureaucracy-oriented, it's worth it.

Finally, sketching out a plan to tackle the blemishes on your report and improve your credit score will be a drawn-out process requiring restraint, discipline and self-control. Here are some basic pointers to keep in mind when you are in the mall wanting to pull out your credit card to get your hands on those American Eagle jeans.

Your FICO score (or credit score) is derived from different aspects, such as handling of debt, number of credit cards, and credit limit to balance ratio, but without getting into the details, here are some things that might help or hurt your score.

Make sure you pay your bills on time; late payments tend to have a negative effect on your score. Your ratio of credit available versus outstanding balance is an important factor in your credit score. For example, if your credit limit is $2,000 and your outstanding balance is $500 with $1,500 credit remaining, your ratio is 25 percent. Lowering this number by clearing outstanding debts faster has a positive effect on credit scores.

The average age of your account is another determinant of your credit score. So, two things are important here: Try not to cancel your oldest card and don't unnecessarily apply for new credit cards. Refrain from applying for in-store cards such as the GAP cards and Wal-Mart cards, because this has a negative effect on your credit score.

Mastering the art of handling credit is not child's play and requires discipline, constant self-scrutiny and consistent follow up. It's a good habit to have, and starting in college is definitely beneficial. Countless books exploring credit scores have been published, and individuals have underpinned careers analyzing credit scores, so reading an article is only the first step.

But one book, the "Wall Street Journal Complete Personal Finance Guidebook" by Jeff Opdyke, is a comprehensive personal finance journal and also helps navigate aspects relating to credit.

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