Credit Score: What's Your Number?


By Judy Loy, ChFC®, RICP®

Throughout life, we tend to define ourselves and others by our numbers. It starts with the ‘terrible twos,’ hits the ‘tweens’, and moves on to ‘sweet sixteen’. We might focus on a GPA, a salary, a batting average, or a retirement age. My current number of interest is the last ten pounds that I am looking to lose. Recently, a lot of numbers came up in the Loy household when we were looking to refinance our mortgage. Many of our numbers were reviewed by the bank, such as W-9 forms, check stubs and, most importantly, our credit scores. When facing lenders, credit scores are a key determiner of your credit risk and thus whether you will get a loan and how good your terms will be (interest rate). In this article, I want to help you know what a credit score is, why it is important and what you can do to improve it.

Let’s start with defining a credit score. Typically, that number is your FICO score, which is named for the software developed by Fair Isaac and Company. A FICO score can range from 300 to 850, with 760 to 850 giving you the best credit terms. A level from 620 to 639 puts you in the high risk category and makes it very difficult to get a loan. Your FICO score is actually three scores from three different reporting agencies, Equifax, Experian and TransUnion. A bank or lender will use one of these numbers to determine your credit worthiness (whether they should loan you money).

A credit score not only affects your interest rates on credit cards, mortgages, etc. but also is used by insurance companies. Because independent researchers determined a link between credit history and insurance claims, the correlation is strong enough that an insurer can cancel or refuse to renew a policy based on your credit history in some states.

What are some things that affect your credit score? The most important influencer of your credit score is your payment history.  There is one sure thing you can do to keep your score high or to increase it, and that is to pay all of your bills on time. Payment history is 35% of your FICO score. If you have a hard time remembering to write a check, put bills on auto-pay through your bank or credit card. 30% of a credit score is derived from amounts owed. A large number of accounts with balances can indicate a higher risk of over-extension.

FICO will also look at how much is still owed compared with the original loan amounts. Therefore, if you bought a car for $14,000 with a $2,000 down payment and now the loan is at $5,000, it shows a willingness to pay off debt responsibly. The reports will also look at your credit history length, which is 15% FICO. This is why it is important to keep your oldest credit card open as it will give you the longest credit history. Opening new credit accounts can damage your score in two ways: it shortens the average length of your credit history and adds negatively to your New Credit Section which is 10% of your credit score.

The reports will look at how many requests for credit you have made recently and that can damage your score. Having a healthy mix of credit is also a 10% contributor to your credit score. A person paying on time on credit cards, installment loans and a mortgage loan will reach a higher score than one with just a credit card. However, this does not mean you open credit account that you don’t need. It does mean that if you buy a car make your payments on time. Another important note: if you are married, make sure you have one credit card in your name alone if possible. Having all your credit as joint can lead to issues in getting your own loan someday.

Other than a FICO score, some lenders will look at your income, how long you worked at your present job and how long you stayed at one residence. Banks want to know that you have a steady job and income and want to be sure they will be able to find you if they need a payment.

Finally, just as watching your weight and food intake can help lead to a healthy lifestyle and waistline, keeping an eye on your credit score can help you have a healthy financial situation. To get your score, here are the three agencies and their contact information:
Equifax: (800) 685-1111  www.equifax.com
Experian: (888) 397-3742  www.experian.com
TransUnion: (800) 888-4213  www.transunion.com

Checking your number and the accuracy of at least one report a year is advisable. Check your credit score at least six months before you are thinking of taking a loan so you can request corrections for errors or alter your score with some of the tips above.

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