Jun 30, 2015
Credit Scores

A Tale of Two Credit Scores: A Case Study

I have been working on a case study to help students understand credit scores.  Let me know what you think about my draft. Contact me at tim@nextgenpersonalfinance.org if you have any comments or just want the answer key:

A Tale of Two Credit Scores: A Case Study

Staring at the two student files on your desk, you know that you only have a few minutes to review them before your afternoon meetings. Your role as peer financial advisor provides you not only with the opportunity to help others but also has deepened your understanding of so many personal finance topics. Both students have come to you with one simple request: teach me how to increase my credit score. As more financial institutions have freely shared credit scores with their customers, you have seen interest in this topic grow.  

Opening the first file for your 2:00pm appointment, you immediately notice that Samantha Snedeker has what is referred to in industry parlance as “a thin file.” As these words suggest, a consumer with a “thin file” has little borrowing history which often makes it difficult for them to receive a credit score…and without a credit score makes it difficult for them to borrow and establish a credit history. A classic “chicken or egg” problem which is probably why Samantha has sought out your guidance in the first place.

As you review the handwritten notes from your first meeting

  • Excellent budgeting skills; uses an app to track all of her spending and keeps to her $200/month budget
  • History of being responsible with her money, keeps to a budget and has avoided any debt except for a $5,000 federal student loan. Not required to repay her student loan until after graduation.
  • Attitudes toward debt come from her parents, who have religiously paid off their credit cards every month and have excellent credit scores.
  • Interest in credit scores came from an article she read that discussed the importance of establishing a credit history while in college (see Exhibit A)

You now rely on your research skills or more accurately your ability to use Google to find reputable sources to help you come up with recommendations. You type into the Google search bar “how can college students establish a credit history” and skim articles searching for three ideas that will make sense given Samantha’s financial profile and her habits.

  • What three ideas did you come up with for Samantha?

Now, on to James Grant’s file, whose thick file told a very different story of financial habits. Your notes:

  • Never had a budget. Not sure where money his money is going.
  • With 3 credit cards (that his parents cosigned on) has run up a total of $3,500 in debt. Paying minimum off every month and bumping up against $4,000 total credit limit. Average interest rate on credit cards is 23.2%.
  • Loses track of bills and pays about ½ on time. Angry about the late fees and penalties and higher interest rates that keep appearing on his bills.
  • Motivated now to be more financially responsible since he saw how difficult life has become for a friend of his who recently graduated with poor money habits.
  • Considering part-time job (10 hours per week) that will pays $10/hour and wants advice
  • Parents are currently providing enough money to cover his basic needs while in college.
  • Has FICO score of 550

James has said he responds well to detailed plans…he just doesn’t know where to start since he has fallen into this financial abyss. He wants to leave college in two years with 1) an improved credit score and 2) as little debt as possible. You open your Excel spreadsheet (see Credit_Score_CaseStudy) in hopes of answering these questions:

  • How much can James earn in a month from his P/T job? Assume that his net pay is $8/hour.
  • What would the monthly payment on his credit cards need to be in order to have them completely paid off in 18 months (his graduation date)?
  • Would he be able to pay off his credit cards by graduation day and still have money available for his wants? Remember that his parents are covering his basic needs at college.

You also know that you better have recommendations for James on understanding how he is spending his money and a plan for organizing himself financially. You check your watch and realize that his appointment starts in 30 minutes. No time to waste…Good luck!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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