The High Cost of a Low Credit Score

What's Your Credit Score Worth to You?

By: Joseph Cacciapaglia

Applications overflow your campus mailboxes. “You are pre-selected to be pre-approved,” and other similar phrases are all too familiar. If you sign up, you can probably get free movie tickets or a credit card design to “fit your personality.”

Companies even set up tables on campus seducing you with free gifts. For college students, credit cards are everywhere. You can’t to get away from them no matter how hard you try.

Okay, so most of you don’t try to avoid them. The statistics speak for themselves. According to report on PBS' Frontline, more than 641 million credit cards are currently in circulation; plastic that accounts for an estimated $1.5 trillion in consumer spending.

Yet there is a good reason that credit card companies target you. They know you don’t fully understand their fine print, and they know you will make them a lot of money. So, how can you protect yourself?

You can learn about credit, and how to maintain a good credit score.

For most of us, talking about our credit score is like talking about a mind-numbing class — it’s very confusing, a little boring and we just don’t like to do it.

Unfortunately, unlike half of what we learn in school, our credit scores will actually affect the rest of our lives. For example, let’s say you are planning to buy a new car, and let’s assume that after putting down a huge down payment, you plan to finance about $10,000.

If you have a credit score more than 680, considered the “prime” category, you have a good chance of getting an interest rate of 0-2.5 percent.

But if your score is under 680, or “sub-prime,” you might have to pay up to 24.99 percent interest.

What’s the big deal, you say? Well, the difference between a zero percent loan and a 24.99 percent loan ends up being $5,952 after only four years.

Now, for some fun optional homework, you should figure out how much extra you would pay when purchasing an average house ($250,000 in Baton Rouge), with a 30-year mortgage if your credit score is sub-prime.

I’ll give you a hint: It’s a lot.

At this point, you’re probably asking yourself, “What exactly is my credit score anyway — and why do banks and finance companies use it to determine how much interest they will charge me?”

First of all, credit bureaus determine your score by looking at five aspects of your credit history: previous credit performance, current level of indebtedness, length of credit use, number of credit inquiries, and types of credit history.

Banks use this score to determine how big a risk they are taking by lending money to you. A low score means that their money is at greater risk, and therefore it makes sense to charge you more to compensate them for that risk.

So what can you do? Well, the first thing that you should do is get a copy of your credit report from each of the three major credit bureaus: Equifax, TransUnion, and Experian.

A recent law has made it possible to receive one report from each agency for free each year (see Your Credit Report), but these reports don’t come with a score.

So, what I suggest that you do is go online and take advantage of the free trial periods that some companies give, which allow you to not only receive all three credit reports, but also all three scores.

Read each one of your reports carefully, and if you find any inaccuracies or omissions, contact the reporting agency immediately to clear up the problem. Often, whatever website you use will have tools to help in doing this.

If you find out that you have good credit (680 plus), that’s great, just keep doing what you’ve been doing and check your report periodically to make sure nothing is mistakenly or fraudulently added.

Also, when you do apply for loans, remember that you do have good credit so you should only accept the best rates.

If, on the other hand, your credit score is not so great, here are some things that you can do to improve it:

Pay all of your bills on time every month.

Remember that your payment performance today becomes your credit history tomorrow.

Even if you have missed payments in the past, if you begin a habit of timely payments now, your credit score will gradually rise to reflect this new pattern.

Pay down your debt

Thirty percent of your score is determined by your debt to credit ratio. This ratio is a measure of how much of your credit you actually are using.

If possible, you should pay off all of your credit cards every month to avoid paying interest, but if you have to carry a balance, make sure it stays below 50 percent. Just having one credit card with a balance over 50 percent negatively impacts your score.

Don’t close your accounts

. Although ideally credit bureaus would like you to have only 2-3 credit cards, if you already have more, closing one or more can reduce your score further. Again, this is because of your debt to credit ratio.

When you close accounts, your available credit goes down, so this ratio goes up.

Also, having a longer credit history is has a positive affect on your credit score, so closing older accounts further reduces your score.

If you don’t trust yourself using a certain card, just cut it up, but leave the account open.

If you don’t have a credit card, get one

. Having different types of credit accounts positively affects your score. So if you have never had an installment loan or credit card, you should open one.

What? No, I’m not telling you to go out and spend money that you don’t have on things that you don’t need. Use this money for things that you were already going to buy, like groceries and textbooks, and then immediately pay off the balance. This way you won’t pay any interest, and your score will improve.

I know it seems tedious, but taking these small steps towards financial responsibility now, will save you thousands of dollars in interest payments over your lifetime, and ensure that you will always be able to borrow money to buy the things that you need when you need them.

Joseph Cacciapaglia is a senior majoring in accounting at Louisiana State University

For a free credit report and score, please visit Free Credit Report a division of Experian.

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