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Unveiling the mystery of a credit score
WRITTEN BY :   Marianne Noss, Downey Federal Credit Union

Your credit score is a very important number in your life because it is a predictor of how likely you are to make your credit payments on time. In other words, your credit score is a major contributor and a reflection of your creditworthiness. Each person’s score is based on information contained in his/her credit report.
Credit scores affect your ability to get credit and what interest rate you will pay for credit cards, auto loans, mortgages, and other types of credit. A higher credit score means you are more likely to be approved for new credit, and pay a lower interest rate on your loan. Your credit score may also determine how big a deposit you will have to pay for telephone, electricity, or natural gas service.
Fair Isaac Company (known as FICO) was the original developer of credit scores. FICO worked with each of the three major credit bureaus (Experian, Equifax, and Trans Union) to develop a scoring system. The credit bureau scores may vary among each credit bureau because of the different information each bureau receives about you. Lenders purchase your score from one of the three credit bureaus to determine your creditworthiness.
FICO scores typically range from 300-850 – the higher the score, the better interest rate you will receive. Your credit score depends on the information the credit bureau receives from banks, credit unions, department stores, and companies who extend credit to you, including utility companies. The information on your account, which is reported to credit bureaus, is called a “trade line”, and is one factor used to compute a credit score.
How Your Score is Determined
As a rule, credit scores are derived from five sources, 1) your payment history, 2) how much you owe, 3) the length of your credit history, 4) new credit, and 5) types of credit used. Here is a brief description of each source:
1. Payment History – about 35% of a FICO Score
How and when you pay your bills is important. Late payments, bankruptcies and other negative items can hurt your credit score. A solid record of on-time payments can help your score.
2. How Much You Owe- about 30% of a FICO Score
FICO scores look at the amount 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 available credit limit, the lower your score will be.
Example: If your credit limit is $5,000 and you have a $1,000 balance, you have used 20% of your limit. If your balance is $4,500 on a $5,000 credit limit, you have used 90% of your available credit limit. This higher balance will affect your credit score and your ability to borrow more from another source.
3. Length of Your Credit – about 15% of a FICO Score
Having a longer credit history will increase your credit score. However, if you have a short credit history, you can still have a high score by using responsible credit management.
4. New Credit – about 10% of a FICO Score
If you have recently applied for, or opened new credit accounts, the credit scoring formula will weigh this fact against the rest of your credit history. A FICO score will distinguish between a search for a single loan or a search for many new credit lines by the length of time the inquiries occur. When you shop for a new loan, please inform the credit manager to only pull your credit report when necessary. In addition to your credit score, there is a mix of credit types on your credit report which can add slightly to the score. This mix can include a mortgage, auto loan, credit cards, and personal lines of credit.
Be aware of how much credit you use to keep your credit score healthy.
Monitoring Your Credit
Check your credit score once a year to monitor your financial health. Here are some sources to monitor your credit report and/or score.
Annual Credit Report.com -A free service where you can get all three credit bureau reports each year. Click on the website annualcreditreport.com to get your free annual credit report or call 1-877-322.8228.
MYFICO.com – one credit report is $14.95, all three credit reports at $44.85.
Individual Credit Reporting Agencies:
Equifax 1-800-685-1111 or web www.equifax.com
Experian: 1-866-200-6020 or web www.experian.com
Trans Union: 1-800-888-4213 or web www.transunion.com

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Published: June 07, 2012 – Volume 11 – Issue 08



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