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Your
Credit Score
Consumer Federation of America
Fair Isaac Corporation
Credit Scores Are Vital to Your Financial Health
A credit score is a number that helps lenders
and others predict how likely you are to make your credit payments
on time. Each score is based on the information then in your
credit report.
Why Do Your Scores Matter?
Credit scores affect whether you can get credit
and what you pay for credit cards, auto loans, mortgages and
other kinds of credit. For most kinds of credit scores, higher
scores mean you are more likely to be approved and pay a lower
interest rate on new credit.
Want to rent an apartment? Without good scores,
your apartment application may be turned down by the landlord.
Your scores also may determine how big a deposit you will have
to pay for telephone, electricity or natural gas service.
Lenders look at your scores all the time. They
look at your scores when deciding, for example, whether to
change your interest rate or credit limit on a credit card,
or whether to send you an offer through the mail. Having good
credit scores makes your financial dealings a lot easier and
can save you money in lower interest rates. That's why they
are a vital part of your financial health.
| Consider
a couple who is looking to buy their first house. |
Let's say they want a thirty-year mortgage
loan and their FICO credit scores are 720.
They could qualify for a mortgage with a low 5.5 percent
interest rate*. But if their scores are 580,
they probably would pay 8.5 percent* or more -- that's
at least 3 full percentage points more in interest. On
a $100,000 mortgage loan, that 3 point difference will
cost them $2,400 dollars a year, adding up to $72,000
dollars more over the loan's 30-year lifetime. Your
credit scores do matter.
*Interest rates are subject to change.
These rates were offered by lenders in 2005.
|
What is a Good Score?
When
lenders talk about "your score," they
usually mean the FICO® score developed by Fair Isaac Corporation.
It is today's most commonly used scoring system. FICO scores
range from 300-850, and most people score in the 600s and 700s
(higher FICO scores are better). Lenders buy your FICO score
from three national credit reporting agencies (also called
credit bureaus): Equifax, Experian and TransUnion.
In the eyes of most lenders, FICO credit scores
above 700 are very good and a sign of good financial health.
FICO scores below 600 indicate high risk to lenders and could
lead lenders to charge you much higher rates or turn down your
credit application.
Not Just One Score
There are many types of credit scores. They
are developed by independent companies, credit reporting agencies,
and even some lenders. As a rule, the higher the score, the
better.
-
Each credit reporting agency calculates
your score and each score may be different because
the credit history each agency has about you may be different.
Lenders may make a credit card or auto loan decision based
on a single agency's score, although others such as mortgage
lenders often will look at all three scores.
-
Many insurance companies use something
similar when setting your insurance rates, called
a “credit-based insurance score.” You may be able to improve
your insurance score by improving how you handle credit,
which in turn may lower your premium payments on auto or
homeowners insurance.
-
Some credit scores offered to consumers
are just estimates and are different from the
credit risk scores lenders actually use, although they
may appear similar. Consumer reporting agencies and other
companies sometimes use an estimated score to illustrate
a consumer's general level of credit risk. How might you
tell whether a score is estimated? Ask the company if the
score is used by most lenders. If it isn't, it is likely
to be an estimated score.
Five Parts to Your FICO Credit Scores
As a rule, credit scores analyze the credit-related
information on your credit report. How they do this varies.
Since FICO scores are frequently used, here is how these scores
assess what is on your credit report.
1. |
Your payment history – about
35% of a FICO score
Have you paid your credit accounts on time? Late payments, bankruptcies,
and other negative items can hurt your credit score. But a solid record
of on-time payments helps your score.
|
2. |
How much you owe – about
30% of a FICO score
FICO scores look at the amounts you owe on all your accounts, the number
of accounts with balances, and how much of your available credit you are
using. The more you owe compared to your credit limit, the lower your score
will be.
|
3. |
Length of your credit history
– about 15% of a FICO score
A longer credit history will increase your score. However, you can get
a high score with a short credit history if the rest of your credit report
shows responsible credit management.
|
4. |
New credit – about 10% of
a FICO score
If you have recently applied for or opened new credit accounts, your credit
score will weigh this fact against the rest of your credit history. FICO
scores distinguish between a search for a single loan and a search for
many new credit lines, in part by the length of time over which inquiries
occur. If you need a loan, do your rate shopping within a focused period
of time, such as 30 days, to avoid lowering your FICO score.
|
5. |
Other factors – about
10% of a FICO score
Several minor factors also can influence your score. For example, having
a mix of credit types on your credit report – credit cards, installment
loans such as a mortgage or auto loan, and personal lines of credit –
is normal for people with longer credit histories and can add slightly
to their scores. |
| What's
NOT In Your Scores |
By law, credit scores may not consider
your race, color, religion, national origin, sex and
marital status, and whether you receive public assistance
or exercise any consumer right under the federal Equal
Credit Opportunity Act or the Fair Credit Reporting Act.
|
Learn Your Scores Soon
It's now easy to get your credit scores to
check your financial health. Different sources provide credit
scores to consumers via the Internet, telephone or U.S. Mail.
For most scores, you will need to pay a small amount. You also
will be asked to prove your identity to make sure your financial
information isn't given to the wrong person.
Here are recommended places you can
get your scores:
| Source |
Cost |
Description |
Score
range |
ANNUAL CREDIT
REPORT SERVICE
Congress recently established this outlet to make it easier for consumers
to get their credit reports and credit scores from the three national credit
reporting agencies.
Web: www.annualcreditreport.com
Phone: 1 877 322 8228
U.S. Mail:
Annual Credit Report Request Service
P. O. Box 105281
Atlanta, GA 30348-5281 |
The price for credit scores
is being determined by the Federal
Trade Commission.
One free credit report per year from
each credit reporting agency.
|
Each credit reporting
agency offers a different type of credit score to consumers. |
FICO score via:
Equifax 300-850
Experian score 330-830
TransUnion score 150-934 |
MYFICO.COM
The consumer Internet site of Fair Isaac Corporation
which developed the FICO score.
Web: www.myfico.com
|
$14.95
for one FICO score and credit report. $44.85 for all
three FICO scores and credit reports from the three credit
reporting agencies (2005 pricing). |
This score
is most often used by lenders. It lets you see how prospective
lenders would evaluate your credit history. |
FICO score
from Equifax, Experian and/or Trans Union 300-850 |
INDIVIDUAL CREDIT
REPORTING AGENCIES:
Equifax
Web: www.equifax.com
Phone: 1 800 685 1111
Experian
Web: www.experian.com
Phone: 1 866 200 6020
TransUnion
Web: www.transunion.com
Phone: 1 800-888-4213
|
Prices
for credit scores with credit reports vary from $14.95
to $34.95 (2005 pricing). |
Each credit
reporting agency offers a different type of credit score
to consumers. |
FICO score
via:
Equifax 300-850
Experian score 330-830
TransUnion score 150-934 |
MORTGAGE LENDERS
|
Credit Score is free
when applying for mortgage or home equity loan. |
This score will likely
be the actual score used to evaluate your application.
Ask your lender to be sure. |
FICO score from Equifax,
Experian or Trans Union 300-850 |
Want Examples? Meet Vera, A Single Mother
| Behavior
of action |
Change
in score |
Vera's
current FICO score |
March
2004
Vera and husband Dave have been married for 10 years. They have one daughter
April, age 4. Financially they are making payments on time for two car
loans, one mortgage and four credit cards which have low balances. But
sadly, their marriage has deteriorated and they agree to divorce. In the
settlement Vera retains custody of April. Dave takes one of the cars and
responsibility for its loan. He also takes two of their four credit cards,
and agrees to pay 50 percent of the monthly mortgage payments. |
---
|
780 |
May
Dave struggles financially following the divorce and runs up his two
credit cards to nearly their limit. Vera doesn’t realize her name
is still on the card accounts Dave is using.
|
-80 |
700 |
July
Dave continues to struggle and misses payments on both cards. Both cards
still are nearly maxed out.
|
-100 |
600
|
August
Vera gets a call from her bank about the missed payments. Once she understands
what has happened, she contacts Dave and asks him to roll over the
balances on both cards to a new card that he opens in his name only,
which he does. Paying off the two accounts improves her score.
|
+80 |
680 |
February
2005
Vera continues to manage her money carefully, paying her bills on time
and keeping her two card balances low. Meanwhile the two missed payments
get older on her credit file and have less impact to her score. Dave lands
a better job and makes his part of the mortgage payments on time. |
+40 |
720 |
March
Vera’s car breaks down. Since she relies on it to get to work and to take
April to preschool, she has no choice but to have it repaired. To pay
the garage she maxes out one of her credit cards. |
-80 |
640 |
April
Since Vera needs a reliable car, she asks her bank about auto loan rates.
They tell her that her credit score is too low to qualify her for their
best rate. Since money is tight, she waits to buy a car. |
--- |
640 |
July
Vera has steadily paid down her high credit card balance and monitored
her score. When her score has improved, Vera applies and is approved
for an excellent rate on an auto loan. She buys a used car and feels
good about how she has managed her credit. |
+40 |
680 |
Now Meet Don and Doris
| Behavior
of action |
Change
in score |
Don
and Doris's current FICO score |
March
2004
Don and Doris are married and in their 50s. They have twin sons who graduated
from college a year ago, have good jobs and live in different states. Don
and Doris have been managing their money carefully for 30 years. They are
making payments on a mortgage, three credit cards with large balances,
and a $50,000 bank loan that paid for their sons’ college. Now that their
sons are on their own financially, Don and Doris focus on paying down their
credit card balances by making larger monthly payments and using their
cards sparingly. |
---
|
690 |
March
2005
After a year of steady payments, their credit card balances are significantly
lower. They continue to manage their credit well and haven’t opened any
new accounts.
|
+50 |
740 |
June
The couple decides to go on an extended vacation, taking leaves of absence
from the jobs to so they can tour the U.S. in a motor home. They
buy their motor home with help from a new bank loan at a favorable
rate, thanks to their good credit scores. But opening the new loan
lowers their scores a bit. Since their plans will keep them on the
road for three months, they put one of their sons in charge of paying
their monthly bills.
|
-20 |
720
|
September
They have a wonderful vacation. When they return, they find they had
neglected to tell their son about the bank loan. He didn't open the
invoices they received from the bank thinking they were monthly account
statements. Now their bank loan payment is 60 days late.
|
-75 |
645 |
October
Doris calls the bank, explains the mix-up and sends in the overdue payments
immediately. A couple of weeks later their bank conveys their new account
information to the credit reporting agencies, where it is available
to influence their credit scores. |
+20 |
665 |
April
2006
After six more months of on-time payments, their credit scores have steadily
improved. Although the late payment will remain on their credit reports
for seven years, it will impact their scores less as time passes. Don and
Doris are on track once again to regain their good FICO credit scores in
the 700s. |
+30 |
695 |
| * Don and
Doris have separate FICO score, but in this example,
they would rise and fall together. |
Helpful Tips
| 1. |
When you get your credit scores,
make sure you also learn the highest and lowest scores
possible, as well as the most important factors that
influenced your scores. These factors can give you an
idea of how you can improve your scores.
|
| 2. |
Getting your own credit scores or
credit reports won't affect your scores, as long as you
order them from one of the sources we list here.
|
| 3. |
Review your credit reports for accuracy.
Mistakes and omissions on your credit reports probably
will affect your credit scores. If you spot an error,
contact the credit reporting agency and the creditor
whose information is wrong.
|
| 4. |
If you have questions or problems
with your credit scores, contact the company that provided
them to you.
|
Boosting Your Scores
Your credit scores change when new information
is reported by your creditors. So your scores will improve
over time when you manage your credit responsibly.
Here are some general ways to improve your
credit scores:
-
Pay your bills on time. Delinquent
payments and collections can really hurt your score.
-
Keep balances low on credit cards. High
debt levels can hurt your score.
-
Pay off debt rather than moving
it between credit cards. The most effective way
to improve your score in this area is to pay down your
revolving credit.
-
Apply for and open new credit accounts
only when you need them.
-
Check your credit report regularly
for accuracy and contact the creditor and credit
reporting agency to correct any errors.
-
If you have missed payments, get
current and stay current. The longer you pay your
bills on time, the better your score.
| Improving
your credit scores can help you: |
- Lower your interest rates
- Speed up credit approvals
- Reduce deposits required by utilities
- Get approved for apartments
- Get better credit card, auto loan
and mortgage offers
|
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# # # # #
This publication has been prepared by Consumer
Federation of America and Fair
Isaac Corporation, and was reviewed by the Federal Citizen
Information Center.
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