YOUR CREDIT SCORES
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 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 3D-year mortgage loan and their FICOQ!)
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 3D-year lifetime. Your credit scores do matter.
* Interest rates are subject to change.
These rates were offered by lenders in 2005.
Five parts to your FICQ@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
FICOscores 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 credit history-about 15% of a FICOscore
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
Five parts to your FICQ@credit 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.
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.
• Your credit score changes when your information changes at
that credit reporting agency. This is good news! It means you
can improve a poor score over time by improving how you
handle credit.
• 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.
Helpful tips
 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.
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.
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.
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.
• Payoff 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.
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