In this issue:
- Introduction
- Featured Article: Number, Numbers Everywhere
- Scholarship Update
- A Word from our Sponsors
- Privacy and Subscription Information
- Back Issues
- Sponsor this newsletter!
Welcome to the October 2005 issue of FinancialAidNews.com! This month, I want to tackle numbers - specifically, your FICO score. If you don't know what a FICO score is, or you're fuzzy on it, hopefully by the end of the newsletter everything will be clear. We'll also touch on student loan consolidation and how it affects your credit, as well as some information from the podcast.
Speaking of which, if you haven't subscribed to the Financial Aid Podcast, you should. We're giving away for free our new e-book, Scholarship Searching Secrets, which contains the most powerful tools we've ever published for finding free scholarships, but you can only get it by subscribing to the Financial Aid Podcast. Plus, the Financial Aid Podcast features DAILY updates about student loans, scholarships, education news, personal finance, and the best in free, legal music.
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Enjoy this month's newsletter!
Christopher S. Penn
Publisher, The Student Financial Aid News
Producer/Director, The Financial Aid Podcast
The Student Financial Aid News
A Publication of the Student Loan Network
1250 Hancock Street, Suite 703N
Quincy, MA 02169
Featured Sponsor: Grace period ending soon? Consolidate student loans!
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Why consolidate?
- Lock in low interest rates for a fixed rate you can budget
- Make only one payment each month
- Improve your credit rating (see this month's feature article)
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- Cut your monthly payments as much as 50%
Start now!
Feature Article: Numbers, Numbers Everywhere
This month, I'd like to expand on previous discussions about credit and credit scores. We've talked in the past about the basics of credit and credit scoring, and this morning I located a series of breakouts for determining your credit "grade". Let's get into more details right away.
What's a good credit score? No one ever really makes that clear. According to the Fair Isaac Company, credit scores break out into these brackets:
- 720-850: Outstanding credit ("AA")
- 700-719: Very Good credit ("A")
- 675-699: Good credit ("B")
- 620-674: Acceptable credit ("C")
- 560-619: Poor credit ("D")
- 500-560: Very poor credit ("E")
- Below 500: No credit, credit-based applications denied outright ("F")
The grades are arbitrarily assigned.
So, how do you get your credit score? That's the downside. As of September 1, 2005, everyone in the United States was eligible to get a free credit report, but that report does NOT include your FICO score. For that, you have to pay. Conveniently, and not coincidentally, the Student Loan Network has an agreement with Experian (one of the three credit bureaus) so that you can purchase a credit report with score:
http://www.StudentPlatinum.com
Why? The credit bureaus were compelled by the government to offer the basic credit report for error-correcting purposes, but the score isn't relevant to correction of errors.
To offset the cost of sending anyone a report who wanted one, the bureaus withheld anything not related to error-correction, in the hopes that by making you apply through their web site, they could get you to pay for one or more unnecessary services.
So, how is the score used? Well, fairly straightforward: the score - your score - is washed through a computer program. The software that lenders use can spit out yes or no decisions, or tiered decisions. For example:
- 720-850: Yes
- 700-719: Yes
- 675-699: Yes
- 620-674: Maybe
- 560-619: No
- 500-560: No
- Below 500: Definitely No
or if you were applying for, say, a mortgage:
- 720-850: Give this customer a 5% interest rate
- 700-719: Give this customer a 5.2% interest rate
- 675-699: Give this customer a 6% interest rate
- 620-674: Give this customer a 7% interest rate
- 560-619: Give this customer a 8% interest rate
- 500-560: Give this customer a 9.5% interest rate
- Below 500: Do not give this customer a mortgage
So one little number could open or close doors, or cost you hundreds, if not thousands of dollars.
What can you do to improve your credit? Seven steps for better credit health:
Step 1: Obtain your credit report.
Because scores are computed based on the information in your credit report, the first step is to obtain a copy of your credit report. If you have been declined for a loan or credit-based service, you are entitled to a free copy of your credit report; contact the declining lender for more information. All US citizens and permanent residents are also eligible for one free credit report from the credit bureaus annually.
To get a copy of your credit report WITH score (this is not free!):
http://www.StudentPlatinum.com
Step 2: Clean up your credit report.
Review your credit report for accuracy. Even in cases where information is accurate, you are permitted and encouraged to submit your own information to be appended to your credit report. For example, if you have missed a payment due to loss of a job, you can submit that information to be included when a lender requests your credit report.
Step 3: Review the FICO Score Breakdown.
We presented earlier the FICO score breakdown. Based on this, you can choose the strategy you want to use to improve your credit.
35% Payment history
30% Outstanding debt
15% Length of your credit history
10% Recent inquiries on your credit report
10% Types of credit in use
Payment history examines how you've made your payments. Did you make payments on time and in full? If you have late payments, how late are they?
Outstanding debt examines how much you've borrowed, both in dollar amount and in perecentage of available credit. For example, a credit card with a $15,000 limit that is charged to $14,998 (99% debt load) is penalized more heavily than two credit cards with $15,000 limits that are charged $7,449 each (49% debt load each).
Length of credit history examines how long you have been a borrower. There are some lending institutions that will not lend to persons with short or no credit histories.
Recent inquiries on your credit report tracks how many institutions have inquired about your credit. A large volume of inquiries, especially from similar institutions (such as mortgage brokers) may indicate a significant need for credit and is considered negative.
Types of credit in use looks at how many forms of credit you have. Positives include a variety of credit types with little repetition, such as a mortgage, auto loan, credit card, etc. Negatives would be a series of credit cards or home equity loans. The more diverse and non-repetitive your credit is, the better your score.
Step 4: Cease adding new debt.
While this may seem overly obvious, it's not easy to implement. Put together a monthly budget on a simple spreadsheet and determine how much you are spending. Adjust your spending habits so that your income always exceeds your expenses by at least 10%, or the minimum monthly payment on your largest debt, whichever is larger.
Step 5: Turn over a new leaf.
Given that 65% of your FICO score is based on outstanding debt and payment history, the next most obvious step is to reduce one of the two. You cannot change your past history, unfortunately, beyond adding your own documentation and comments to your record. Only time can change that first 35% as you develop a successful credit history. Your credit history is a moving target - each new day adds a new entry to your record and drops a day off the tail end of your history. That brings us to the next point:
Make a commitment to yourself: pay your bills with the minimum requried payment or more when due.
Nothing will help you improve your credit faster than simply making the required payments to your creditors when due.
Step 6: Reduce your debt load.
The next 30% of your credit score is how much debt you have. Personal finance advocates will rightly suggest that you pay off your bills as quickly as possible, starting with the loans that have the highest interest rates first. Doing so is sound fiscal policy.
However, recall that you are also penalized for loans which you have nearly reached or reached the credit limit. Make a best effort to reduce your debt load on these loans to 75% or less of the total available credit.
If your goal is overall financial health, devote your attention to the highest interest rate loans first. Refinance them if you can, otherwise pay them down.
If your goal is primarily improved credit, reduce your debt loads on maxed-out loans first, then focus on interest rates once your debt loads fall below 75%.
Step 7: Consolidate your debts.
Recall that the number of loans and types also matters - 10% of your credit score. Consolidate as many of your debts as you can. Use Student Loan Consolidation to reduce the number of student loans you have outstanding. Avail yourself of credit card consolidation services when it makes sense to do so. If you have mortgages and home equities, consider refinancing to lock in a historically low interest rate and reduce the number of total loans.
Consolidate student loans here:
http://www.StudentLoanConsolidator.com
Now, thusly armed, go out and clean up your credit! Just one point - from 719 to 720 or 699 to 700 - can make a huge difference in your financial future.
More information about credit:
http://www.StudentPlatinum.com
Why should you subscribe to the free Financial Aid Podcast? Well, scholarship updates on a near-daily basis, for one. Here's a list of recent scholarship updates in the podcast that you won't get anywhere else:
+ New secret keyphrase in your online search
+ Free vs. paid - paid saves you time, free saves you money
+ The Billy Joel Fellowships for Musical Composition
+ Seven schools in the Northeast
+ National Endowment for the Humanities
+ Huge directory of grants
+ $12,500 unrestricted scholarship from the (ISC)2 for students studying information security
+ Target $25,000 scholarship
+ The Motorola MotoFWRD (Motorola Forward, I suppose?) Scholarship
+ $10,000 cash plus a free car
+ Runners up receie $2,500 plus free Motorola gear
+ Hundreds of scholarships available in a directory published by the United Negro College Fund
+ Google Search History
+ The Reverse Scholarship - forgiveness for education debt after school ends
+ New Jersey, $20,000 in student loan forgiveness for social workers
+ Hispanic Scholarship Fund
The Scholarship Searching Secrets e-Book is also included for free, a $49.99 value.
Here's how to subscribe - it's free and easy!
Step 1: Download the free iTunes software from www.iTunes.com and install it.
Step 2: Start iTunes, and click on the Advanced menu and select Subscribe to Podcast...
Step 3: Paste this URL into the box and click OK:
http://feeds.feedburner.com/StudentFinancialAidNews
As a reminder, of course, you can always use our Premium Scholarship Search Service beginning at $29.99/year for access to a database of more than 2.5 million scholarships worth more than $14 billion. Visit:
http://www.GotScholarships.com
And now a word from our sponsors...
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Student Credit Cards
Got credit? Student credit cards can - if used properly and prudently - be a great stepping stone towards the establishment of great credit. Find out more about credit cards and establishing credit, and get the Chase Ultimate Rewards Student Credit Card online! Visit:
http://www.StudentPlatinum.com
Study Abroad Loans!
Are you a US student who needs a loan for studying abroad? Look no further than Study Abroad Loans. We provide up to $30,000 per year for all study-abroad education expenses. Visit:
http://www.StudyAbroadLoans.com
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