Keeping Score – Facts About Credit Scores

Every time you apply for a new credit card, a mortgage, perhaps even an insurance policy or a job, your application is judged in part on your credit score.

What is a credit score?
A credit score is a three-digit number that lenders use to objectively measure your creditworthiness. “The score allows creditors to rank consumers from high to low in respect to their likelihood of repaying credit,” says Suzanne Boas, president of Consumer Credit Counseling Services of Atlanta. “If you have a high score, you’re likely to repay. If you have a low score, you’re unlikely to repay.”

Your credit score is a snapshot of your finances at a particular moment in time. As information in your credit file changes, so will your credit score. “If you use your credit card, pay your mortgage or pay the auto loan company, each of those events is going to change the information in your credit file,” says Craig Watts, consumer affairs manager for Fair Isaac Corporation (FICO), a company in San Rafael, California, which is the largest creator of credit scores.

What factors are taken into consideration for my credit score?
First, it’s important to know what’s not factored into your credit score. “They’re not looking at race, religion, nationality or anything like that,” Boas says. “They look primarily at credit information.” That information falls into five categories:

• Payment history. This is perhaps the most important factor. Have you ever had an account sent to collections? How many times have you been late? How late or how recent were those late payments?
• Total debt. How much overall debt do you have? How many credit cards have balances on them? How many are close to their limits? How close are you to your overall credit limit?
• Length of credit history. Is the person an emerging consumer or someone who has paid bills on time for 10 years?
• New credit. Are you shopping aggressively for credit right now? A flurry of activity and inquiries on your credit report raises suspicion.
• Credit mix. Do you have a healthy mix of credit: bank cards (VISA,® MasterCard), store cards, gasoline cards and so on?

Who uses my credit score?
Lenders are the primary – but not the only – users of credit scores. Employers, landlords and other businesses also check credit scores to evaluate applicants. “They’re used for a lot of different purposes besides credit,” says Gerri Detweiler, author of “The Ultimate Credit Handbook.”

What happens if I have a low credit score?
Each lender sets different ranges for what it considers “good” and “bad” credit scores. The average person with “A” credit – also known as a “prime” customer – has a FICO score of 650 or higher on a scale of approximately 900. If your score is lower, you may be considered a “subprime” customer. Consumers with lower credit scores often pay higher interest rates on mortgages and credit cards because they’re viewed as riskier customers.

“Knowing your credit score will help you understand why you got one product offered to you at a certain rate instead of a less expensive rate,” Boas says. “The offers you receive are a reflection of your score and riskiness.”

To help people who previously haven’t been able to prove they’re worthy of credit, Fair Isaac introduced the FICO Expansion™ Score. The new score is based on deposit account records payday loan repayment, purchases made on payment plans and other nontraditional data.

What can I do to improve my credit score?
“It’s not easy to change your credit score dramatically in a short period of time,” Says Detweiler. Why? Because your credit score takes you entire credit history into account. If you’ve chronically paid bills late, you’ll need to change your habits to see a change in your credit score.

“The best thing you can do to improve your credit standing is to pay bills on time and keep your balances low on credit cards and other revolving accounts,” Watts says. “If you do those two things, and nothing else, you’ll help your credit standing.”

Where can I find my credit score?
In years past, you could only learn your credit score if you were turned down for credit. Even then, your score likely wasn’t explained to you.

Fortunately, consumers are gaining ever-wider access to their credit scores and learning more about what the numbers mean. Fair Isaac and Equifax have teamed up to provide a detailed credit score along with your credit report, for free, at myfico.com. Other agencies, such as Experian and TransUnion, also offer such information online.

In addition, the Fair and Accurate Credit Transactions Act (FACT Act) of 2003, which amends the Fair Credit Reporting Act, requires each major credit bureau to provide one free credit report annually to consumers who request a copy (call 877.322.8228 or visit annualcreditreport.com). It also lets consumers obtain credit score information for a reasonable fee. The FACT Act also requires mortgage lenders that use credit scores from credit bureaus to provide credit applicants with the score information used in connection with their mortgage loans.

Remember: Your credit score is only as good as the explanation behind it. “Don’t’ get too wrapped up in a three-digit number,” Watts says. “What consumers need to know is what is behind their score: why the score turned out as it did, what they’ve done in their credit management that changed the way lenders view their credit risks and what steps they can take to improve their credit over time.”

Useful Resources
National Foundation for Credit Counseling (NFCC): fncc.org
Fair Isaac Corp. Website offers a consumer education section with FAQs on credit scores, explanation
of scoring and related topics: fairisaac.com
Experian: experian.com
Equifax: equifax.com
TransUnion: transunion.com