« Back to Previous Page
0
0

When the discussion in my class turns to credit, the topic of credit scores always comes up. I have a lot of discussion about the importance of a credit score to get student thoughts. The problem I run into is that most students value this score so much that their financial success is based on it. Does anyone have thoughts on the psychology of this since a credit score is really a debt score that has not been around that long that does not look at the whole financial picture of how they handle money?

Marked as spam
Posted by kossjoe1999
Asked on January 28, 2016 7:13 pm
54 views
1
Private answer

A few ideas that I’ll throw out there:
1. Ask students to come up with a list of what they think important measures of financial success might be. Typical answers include assets: savings accounts, home, auto, investment accounts, human capital (incredibly important for young people to understand that is their most valuable asset). Then ask them to list liabilities like credit card debt, a home mortgage, auto loans. Ultimately net worth is what matters: assets – liabilities.

Lower credit scores are typically the symptoms of a larger problem (except in case of young people with no credit history). Low credit scores often arise due to liabilities being out of control which makes on-time payments difficult. It also usually means that you have not been able to build up assets, which you would otherwise use to service your debt.

2. Interesting factoid is that one of the world’s best investors, Warren Buffett, has an average credit score: Fortune Magazine reported that Warren Buffett has a FICO score of 718 (2008, March 31, The Oracle’s Credit Crisis).

Marked as spam
Posted by Tim Ranzetta
Answered on February 1, 2016 5:57 pm
1
Private answer

Honestly, the score really shouldn’t be the most important thing. The HISTORY is the most important thing for students to understand.

I use a pie analogy. You could tell your students that to think of their score as an apple pie. But into order to make a good apple pie (or score) the ingredients you put into it can change the taste or flavor. Having too much sugar could ruin the pie or not pre-heating the oven will take longer for it to bake. Whatever you decide the ingredients are – sugar (credit cards), oven (length of time), apples (types of debt) ect… make them work for your audience. Hopefully they will begin to understand that the score isn’t the most important thing.

One other thing to note – that different banks/lenders use different scoring modules. While most use FICO, not everyone does. Also, not everyone updates their FICO software at every update. Think of it like an Iphone release. When the iPhone 6s came out, not everyone went out and got it, some wait, while others might wait for the next iPhone 7. Something to consider when teaching students too – for more info on FICO scoring go here: http://web.extension.illinois.edu/cfiv/eb141/entry_9288/

Marked as spam
Posted by SashWhitGrabby
Answered on February 2, 2016 11:18 am
0
Private answer

It’s also worth noting that there are 49 different FICO scores (apparently a different score for buying a home versus a car). http://bucks.blogs.nytimes.com/2012/08/27/why-you-have-49-different-fico-scores/?_r=0 I’m not in the scoring/actuarial industry but have seen this reference a few times over the years. Maybe somebody from FICO could release a slightly more technical paper to us about it (w/o compromising trade secrets).

Marked as spam
Posted by jpwright
Answered on February 2, 2016 12:08 pm
0
Private answer

These were great tips and ways to look at the whole financial picture instead of focusing on just one area. Students have been fed this narrative for so long that they look at it as gospel. I like to change the word “credit score” to “debt score”. That is the only aspect it is looking at in the entire financial situation which does not look at net worth that Tim mentioned in his post. I like that example of Warren Buffet having an average credit score but it does not stop him from buying things and building wealth.

I was not aware of that many calculations for the FICO score. It is interesting about the update and doing them periodically. Some do not make those updates and that can impact the score. Also the score will differ with different purchases. I noticed 60 Minutes did a story back in 2013 that 40 million people have errors on their credit report. The banking industry could have a totally different looking report they are evaluating us that we don’t even have access.

I really appreciate all the help on this since the focus is getting that perfect score (which is not possible based on the algorithm). I hear students opening up credit cards and other forms of debt to establish a score to establish a score.

Marked as spam
Posted by kossjoe1999
Answered on February 2, 2016 5:29 pm
« Back to Previous Page