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Understating Credit Scores

By Kalya Lopez

For 21-year-old Dominic Macias, the concept of credit scores initially seemed like a daunting financial mystery. 

“It kind of is a scary thing when you look at it because it’s like, okay, this one number and how I handle it could dictate big things in my life,” Macias said.

Macias, a senior at Augusta University, said his journey with credit began when he was 15 and became an authorized user on his father’s credit card. 

“At first I was kind of confused with everything,” Macias said. “Credit is kind of a hard topic to (understand) when you’re not familiar with it.” 

It was not until he reached 18 and applied for his first car loan, that the significance of credit scores became more apparent, he said.

Macias explained that he needed his father to co-sign for his car because obtaining a line of credit solely in his name would result in significantly higher interest rates.

A University of Georgia credit ratings expert said credit plays a pivotal role in various aspects of personal finance. 

John Hund, an associate professor in the department of finance at the Terry College of Business, said credit scores are essentially a summary number to express a person’s financial history.

“So you can think of it as one number that summarizes whether you’re more or less likely to pay somebody back,” Hund said.

According to Hund, credit scores are generally produced by one of three large bureaus: Equifax, Experian and TransUnion. 

“The big traditional bureaus inhale every bit of data about your financial past that they can,” Hund said. “Every payment you make on your electric bills. If you had a medical procedure, did you pay that off? Did you take out a loan? Are you paying on student loans? So every sort of payment, or every time you really interact with the financial system, they try to collect that as a data point.”

To establish a good credit record, Hund advised young individuals whose credit history may be thin to acquire a basic credit card.

Hund suggested a basic card from a company such as Capital One or a similar institution would be appropriate. “Then make sure it doesn’t have a very high balance and then put small purchases on that,” he said.

To ensure timely payment, Hund recommended establishing autopay with a bank account set to send the money well ahead of the due date.

Reflecting on his journey, Macias acknowledged his need for ongoing personal finance education.

“I don’t really know the ins and outs of it like a financial advisor,” Macias said. “I’m kind of learning more about it so I can be up to date with new trends.”

Hund offered a roadmap for navigating the world of personal finance resources, emphasizing the value of free governmental material from the Consumer Financial Protection Bureau available at its website, consumerfinance.gov.

“Get it from government regulator websites because they put a lot of energy and effort into making sure they have very clear, unbiased helpful information that’s there,” Hund said.

He cautioned against relying on social media and other potentially misleading platforms, no matter how many followers the personality may have.

“It’s going to affect your life in very important ways and it’s not something that you can summarize in little two-minute videos,” Hund said.

 

 

Kayla Lopez is a journalism student at the University of Georgia.

 

 

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