For most of us, debt is a fact of life. It’s not hard to understand why – post-secondary education expenses have ballooned over the past 40 years. Back in 1980, tuition, fees, and accommodation cost about $9,400 (in 2020 dollars). Today, that figure is nearly two-and-a-half times higher, sitting just below $24,000.
Meanwhile, wages haven’t budged much over time. In 1980, the federal minimum wage sat at $3.10 – or $9.70 in 2020 dollars. Today, Washington State has the highest minimum wage in the country at $13.50. Meanwhile, states like Idaho still allow employers to pay as little as $7.25 an hour. That’s right – some of us make $2/hour less than our parents did 40 years ago.
Suffice to say, many of us borrow tons of cash to pay for post-secondary schooling. According to CNBC, more than two-thirds of 2018 graduates needed loans to pay for their degrees. This isn’t just some rite of passage – it’s something that could seriously impact your creditworthiness down the road.
Recently, banks have been tightening lending standards in response to the COVID crisis. This development has negatively impacted FICO scores. Because of this, many institutions are leaving behind many would-be borrowers.
However, FICO has recently announced a new credit assessment tool – the Resilience Index. What will it mean for college students and graduates? We’ll explore this issue in-depth in today’s post.
What Is A FICO Score?
FICO scores are statistics used by lenders to assess the legitimacy of a borrower. “FICO” is an acronym for the Fair Isaac Corporation, a data analytics firm based in San Jose, California. They debuted the FICO score in 1989; shortly after that, it became the gold standard for determining creditworthiness.
The Fair Issac Corporation determines your FICO score by assessing five indicators of credit risk. These are as follows: The length of one’s credit history, credit utilization, the number of accounts held, recently opened accounts, and payment history.
After assessing your finances against these factors, FICO then assigns you a score. It runs, oddly enough, from 300 to 850. FICO and most lenders consider anything below 580 to be poor. On the other hand, anything above 800 is deemed exceptional.
Few borrowers have a FICO score that is truly bad or exceptional. Most lenders deem a FICO score between 670 to 739 to be a “good” score. However, FICO occasionally changes the weighting of their variables. As such, even borrowers that maintain consistent credit characteristics can have their FICO scores change significantly.
The FICO Resilience Index is one change that could have a significant impact on scores. We’ll break down what it means later. But before we do, let’s address a common question: Can a bad FICO score really impact your life negatively? To be frank, yes.
How Can Your FICO Score Impact Your Finances?
Lenders aren’t the only entities that check credit scores. From phone companies to your landlord, scores of firms do. In other words, if your FICO score tanks, your life can quickly become a living hell.
Let’s start with your bills. If your credit score is low (but not terrible), it can affect the interest rates you pay. Those with scores that slip below 670 may notice a rise in the rate on their credit cards. Need to go back to school for a graduate degree? If you have a “fair” credit score, interest on private student loans can get as high as 14.5%. In both cases, double-digit interest rates can result in monthly payments hundreds of dollars higher than those with good credit.
Are you trying to land that first significant role? Playing fast and loose with your credit can make it tough to get a well-paying, prestigious job. According to the Society for Human Resources Management, 47% of employers admitted to running credit checks on potential hires. Many fear those with bad credit will “help themselves” to company funds or sell trade secrets.
Worst of all, a bad credit score can make it tough to keep a roof over your head. Increasingly, landlords require credit checks from applicants. If you don’t meet a lender’s minimum FICO score, the application process usually ends there. Often, this situation forces those with lousy credit to seek out a roommate. Sometimes, these living arrangements work out. Much of the time, though, they can prevent you from living your best life.
When It Comes To FICO Scores, Every Decision Matters
Often, measures taken against those with bad credit make sense. Businesses don’t want to lose money. Companies don’t want to hire dishonest employees. And landlords want dependable tenants.
There’s just one problem – as a young person, making even one mistake can screw everything up. As someone fresh out of school, you already have one strike against you. If you have a credit card, you’ve probably haven’t had one for long.
You also lack employment experience. It can be hard to find work, and when you do, you may not make all that much. If you miss one credit card, car, or student loan payment, it can have a disproportionate impact on your FICO score.
As such, we implore you – take this topic seriously. Yes, it’s okay to make spontaneous plans and enjoy your youth – but only if you’re able to pay your bills first. If your finances are drum-tight, focus on increasing your earning power/cutting expenses first. Then, save up a “fun fund” that can pay for spur-of-the-moment adventures.
This way, you can make the most of your twenties without compromising more expensive goals (e.g., homeownership) later on in life.
The FICO Resilience Index: Good Or Bad For College Students?
As if worrying about your FICO score wasn’t bad enough, a new metric has arrived on the scene. Recently, outlets like CNBC have reported on the latest tweak FICO has made to its credit reporting. In June, the agency announced the introduction of the FICO Resilience Index. In brief, this scale assesses the resiliency of borrowers to economic shocks.
Unlike past updates, the FICO Resilience Index isn’t a reconfiguration of how it determines FICO scores. Rather, it is a standalone measure that assigns borrowers a score from 1 to 99. The lower your score, the more resilient you are to recessions, sudden job loss, etc. The higher your score, the greater the likelihood you’ll miss payments, or default on loans when things sour.
Unlike traditional FICO scores, which punish the young more harshly for making mistakes, the Resilience Index could be a godsend. That one missed payment three years ago won’t dog you as much anymore. If you’ve managed to stock up an abundant emergency fund and paid down your debts, the Resilience Index would judge you more fairly.
At a time where uncertainty has never been higher, we feel the Resilience Index is a better judge of creditworthiness. In the past, a strong cash position didn’t factor in the computation of your FICO score. Now, this vital stat could help you get better interest rates, find work, and improve your living situation.
The Better Your FICO Number, The Better Off You’ll Be
We’re happy to see the implementation of the Resilience Index. Thanks to this measure, those who have a mostly trouble-free credit record will pay lower interest rates and face less discrimination. However, it’s still important to practice financial prudence, especially in these times.
By spending less than you take in, you’ll avoid overdraft fees and missed bill payments. As a result, your score will climb higher as months and years go by. Interest rates will fall, you’ll find it easier to rent desirable apartments, and you’ll get better job offers.
By focusing on things within your control, you can shape your financial future. Choose wisely.