Credit Scores: What You Need to Know

One number can have a huge impact on how much you’ll pay for interest on a car loan, a home mortgage, insurance, and more. This number is your credit score.
If you’ve rented an apartment, purchased something using the “no interest for a year” deal, or applied for a job where you handle lots of money, there’s a good chance your credit score was pulled.
A high credit score may make it easier for you to get a loan, rent an apartment, or lower your insurance rates.
“Cost is a big deal, and your credit score affects the cost of insurance premiums,” says Penny Crowder, agent at Dawson Insurance in Fargo.
“Actuarial numbers do support a link between credit score and claims, so it just makes sense to use them,” she says.
She adds that each insurance company assesses your credit information differently. The same is true for rental companies, banks, and other businesses that use your credit score to help determine if and how they will do business with you—there isn’t one simple answer to how your credit score is factored into the equation.
Demystifying your credit score will help you find ways to improve a poor score or maintain a good one, which can save you thousands of dollars, not to mention a few headaches down the road.

Credit score defined
Various credit scores are in use, but the most widely used score in the financial service industry is the FICO score (the acronym stands for Fair, Isaac and Company).
The score measures the likelihood that a borrower will default or not repay a loan. The higher your score, the less risk you pose to potential creditors.
While the FICO score is the most common, each credit bureau can also generate its own credit score. The scores are correlated, so a 700 at one bureau is the same as 700 at another. But because the individual credit bureaus might have different information on you, it’s not unusual for credit scores to differ by even 50 or more points from one credit bureau to another. The three national credit bureaus are Equifax, TransUnion, and Experian.

“Scores between 620 and 650 are the average scores and indicate basically good credit.”

How is my score calculated?
Credit bureaus gather information on your credit history and produce a credit report. Your credit report reflects your current credit situation and includes any bill payments you have missed or been late in paying, loans you’ve paid off, and the amount of debt you are carrying. According to the Federal Reserve, information from your credit report used to calculate your credit score can include:

  • Number and type of accounts you have (credit cards, auto loans, mortgages, etc.)
  • Whether you pay your bills on time
  • How much of your available credit you are currently using
  • Whether you have any collection actions against you
  • Amount of your outstanding debt
  • Age of your accounts

Using complex scoring models that give weighted value to such things as payment history, amounts owed, length of credit history, new credit, and types of credit used, the credit bureaus create your credit score.

What does my credit score mean?
FICO scores range from 300 to 850, with the majority of people falling into the 600 to 800 range.
Scores above 650 indicate a very good credit history. People with these scores will usually obtain credit quickly and easily—with favorable terms.
Scores between 620 and 650 are the average scores and indicate basically good credit. People with scores in this range will have a good chance of obtaining credit at favorable rates, but may need to provide additional documentation and explanations for a lender.
Scores below 620 may prevent borrowers from getting the best interest rates and terms—but it does not mean they cannot get credit. The process will be lengthier and this score could push a borrower into a “sub-prime” (higher interest rate) market.

How can I improve my score?
Dwight Schroeder, financial counselor at The Village Family Service Center, says it’s simple—consistently pay your bills on time and don’t use credit heavily. “Even if you do have to pay late, it’s better than not paying at all. Late payments don’t show up on your credit report until they are 30 days late,” he adds.
Some guidelines caution not to use more than 50% of your available credit if you want to maintain or raise your credit score, and others say the less available credit you use, the better.

Other suggestions to improve your credit score:
Do not excessively shop for unsecured credit. Maintain consistency in your credit applications. Use your full legal name—no nicknames.
If you are going to close existing credit card accounts, close those you have had for the least amount of time. The length of relationship with your creditors improves your score.

What if I have no credit score?
Some people simply don’t use credit, so they have no credit history. Crowder says this used to be a problem, but a better differentiation has been made recently between no credit and bad credit.
“There’s a whole generation of people who never financed a thing, but they have improved the system over time so that the scores are a little more accurate. It’s not that they don’t have credit, it’s that they choose not to use credit,” Crowder says.
For someone who doesn’t have a credit history or is having trouble qualifying for a credit card, overdraft protection on your checking account may be a good way to start building credit, says Schroeder. Overdraft protection is a checking account feature in which the bank adds money from another account, or from a line of credit, to your account if needed, which prevents your account from having a negative balance.
“Overdraft protection also starts a relationship with a bank you may want to borrow from in the future,” says Schroeder.

“It saves you so much money to have a good credit score.”

How can I get my credit score?
In some instances, a lender may let you know your credit score at no charge when you apply for credit. For example, if you apply for a home mortgage, you’ll be given the credit score that was used to determine whether the lender will give you credit and what those terms will be. You may also receive a free credit score when you apply for other types of credit including automobile loans or credit cards.
Credit.com has recently begun offering credit scores free to individuals—with no obligation. A number of other websites will give you your credit score for free, but typically there is a trial offer or purchase of some sort of financial product or service required.
You may also buy your credit score from any of the credit bureaus by calling them or visiting their websites.

Equifax: 800-685-1111 or www.equifax.com/compare-products
Experian: 888-397-3742 or www.experian.com/consumer-products/personal-credit.html
TransUnion: 800-493-2392 or www.transunion.com/corporate/personal/creditTools.page

How can I maintain my score?
Pull all three of your credit reports (Experian, Equifax, and TransUnion) once a year, free of charge, at www.annualcreditreport.com. Review them to make sure there hasn’t been any fraudulent activity, and that the information about your accounts is up-to-date. Lenders, landlords, and sometimes even employers use this information to assess how you’ve handled your money in the past and to predict how you might handle it in the future—making it important your information is accurate.
Insurance agent Penny Crowder is an advocate for monitoring her credit online and guarding against identity theft, which can destroy credit.
For a fee, services like Identity Guard (www.identityguard.com) can monitor your accounts and send an email every time someone looks at your credit. Depending on the level of service you purchase, you can also plug in different scenarios, such as closing a credit card (which can often lower your credit score because you are shortening your credit history), to see how it will affect your credit.
“It’s fantastic,” Crowder says. “I raised my credit score using it. It takes some due diligence, but it’s about being proactive. I find it is money well spent.”
Crowder can attest to the rewards of maintaining her credit score. “I bought a car recently, and got a really great interest rate on my car. It saves you so much money to have a good credit score,” she says.

Heidi Roepke is a freelance writer and copy editor/page designer at The Forum of Fargo-Moorhead. She lives in Fargo with her husband, Dave, and their cat, Sahara.

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