Credit Scores – all you need to know

What is a credit score?

Your credit score is a 3-digit number that represents your creditworthiness.  It helps others better understand how financially risky it may be to do business with you.  While there can be different scores companies use, the scoring model most will use when available to them is the FICO Score originally developed by the Fair Isaac Corporation.

What’s a “good” credit score?

FICO scores range from 300-850.  Different creditors may categorize scores into different ranges.  However, here’s a typical breakdown as noted by Experian:

Why is it important?

Utility companies, landlords, and insurance companies, among others, may use it to determine how consistently you will make your payments to them.  If your score is too low, they may choose not do business with you, or may require additional up-front collateral to do so. 

Banks and car dealers also use it to determine whether they will lend you money – and if so, how much interest they’ll charge you.  For example, an “Exceptional” or “Very Good” score may get you the loan approved at their lowest interest rate.  A “Good” score may get approved but at a little higher rate.  A “Fair” score may get approved but at a much higher rate. And a “Poor” score may result in a loan denial.      

A prospective boss may not hire you if your score is considered too low.

How is it determined?

Credit scores are calculated using the content contained in your credit report.  There are three national credit bureau’s which maintain these reports: Experian, Equifax, and TransUnion.  These reports contain a history of borrowing and repaying debts.

Factors that do NOT affect your score are age, gender, employment status, income, and savings.  So, yes, it is possible for an unemployed 25-year old with no savings to have a higher FICO score than a 45-year old making $100,000 salary and $1 million in the bank.  So, what actually does affect your score:

• Payment history (35%)  This reports on whether you make your required payments on time.
• Total debt (30%)  This is both the amount of debt you owe and the usage ratio.  Usage ratio is basically how much do you owe as a percentage of how much credit do you have available to borrow.  The smaller the better.
• Duration (15%)  The longer you’ve had an account the better.  For example, having the same credit card for five years is better than opening a new card every year and transferring the balance.
• New credit (10%)  New applications for credit are considered bad and may lower your score as that is interpreted as borrowing more money from someone else.
• Types of credit (10%)  The mix of credit is taken into consideration.  For example, having five credit cards but no other debt could be viewed as “off balance” and therefore riskier than having a reasonably sized mortgage and one credit card.

How can I get my FICO Credit Score?

The quickest way to get your score is to login to your account with your current credit card provider or bank.

You can also go to www.creditscorecard.com which is the Discover credit card website.  You’ll get pitched to open a card but you can decline the offer.

The three credit bureau’s may also offer free score on their websites, but be aware that they will also try to sell you various products and services.  So, if you download it through them be strong and don’t pay for these additional services.

How can I improve my score?

1. Make your payments on time every time.  30 days after the due date your lack of payment can be reported to the credit bureaus.  For fixed amount payments like your mortgage, car, or student loans, set-up automatic withdrawals or at least electronic reminders.  Simplify the process without losing monitoring ability.
2. Catch up on past due accounts.  A late payment can stay on your report for up to seven years and thereby lower your score.  However, missing a payment several months in a row compounds the negative impact to the score as well as increasing late fees.
3. Don’t get close to your revolving (think credit cards) credit limits.  Experts advise staying below 30% of your limit.  Those with “Exceptional” scores are often under 10%. 
4. Ask your credit card company what day of the month they report your balances to the credit bureaus. Make payment on your card shortly before this date which will improve your credit utilization.  Some banks even allow you to select the due date so you could actually align this to coincide with the date they report to the credit bureaus.
5. Don’t open new credit cards, including store cards, for little perks.  Getting $25 off your purchase may cost you hundreds of dollars in increased interest down the road.   
6. Become an Authorized User on a credit card. This is where someone else with a better credit score than you is the Primary user on the card and agrees to add you as an Authorized User.  The Primary person is responsible for making payments on the card, but the credit card company sends the information to the credit bureau’s for both the Primary user and Authorized User’s credit report.  The result is that the Authorized User automatically gets an account added to their report, and therefore their score, which has good payment history.   

How can I get the Credit Report that determines my score?

Go to www.AnnualCreditReport.com and download your reports.  You are allowed to download your report from each of the three bureaus once every 12 months.  Through December 2023 you are allowed to do this weekly instead of annually.

What’s a credit repair company?

There are companies (like creditrepair.com) that do a very good job of taking actions that will result in your score improving.  The downside of course is that they will charge you a fee and the actions they take are not anything that you can’t take yourself for free.  So, it’s a personal decision as to whether you think the cost is worth your time.  

What’s a debt settlement company?

You may also hear debt settlement referred to as debt relief.  Debt settlement companies will usually instruct you to stop paying your creditors and instead put that money in a separate bank account that will be used toward the eventual settling of your debt.  This settlement could be many months or even years in the future.  In the meantime, your credit score will plummet as your creditors all report to the credit bureau’s that they are no longer receiving any payments from you.

Keep in mind that some creditors may not agree to settlements, and some creditors do not work with debt settlement companies.  The cost of hiring a debt settlement company may be around 15-25% of any debt that you originally owed that they got “forgiven” for you.

Can I negotiate with my creditors myself?

Of course, you can!  Reach out to them.  If they agree to accepting a lesser amount, get that in writing and then make sure you pay what you agreed to pay.

PLEASE KEEP THIS IN MIND…

The long-term goal of any actions to understand your score, credit report information and actions to improve your score should be to get out of debt and make the idea of a credit score meaningless! Remember the proverb, “the borrower is slave to the lender.”  [Proverbs 22:7]