Credit scoring is a system that creditors use to help determine whether or not to give you credit. This score measures the likelihood that a borrower will default or not repay a loan. Credit scoring allows for a quick, objective analysis of credit history.
There are many different credit scores in use, but the most widely used score in the financial service industry is the FICO score generated by the Fair Issac Corp. Each credit bureau can also generate its own credit score. The three national credit bureaus each have their own version of the FICO score with their own names. Equifax has the Beacon system, TransUnion has the Empirica system, and Experian has the Experian/Fair Isaac system.
The scores are correlated so a 700 at one bureau is the same as a 700 at another, but because the bureaus might have different information on you, it is not unusual for credit scores to differ by even 50 or more points from one credit bureau to another.
What does my credit score mean?
Scores above 650 indicate a very good credit history. People with these scores will usually obtain credit quickly and easily – with favorable terms.
Scores between 620 and 650 are the average scores and indicate basically good credit. People with scores in this range will have a good chance of obtaining credit at favorable rates, but may need to provide additional documentation and explanations for a lender.
Scores below 620 may prevent a borrower from getting the best interest rates and terms – but it does not mean they cannot get credit. The process will be lengthier and this score could push a borrower into a "sub prime" market.
What factors affect my score?
Although complex, scoring models generally evaluate the following types of information from your credit report.
- Have you paid your bills on time? It is likely that your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy.
- What is your outstanding debt? Many scoring models evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, that is likely to have a negative affect on your score.
- How long is your credit history? An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances.
- Have you applied for new credit recently? Whenever you apply for new credit, an "inquiry" is placed on your credit report. Too many inquiries on your report may affect your credit score. However, not all inquiries are counted. Inquiries by creditors who are monitoring your account or looking at credit reports to make "pre-screened" credit offers are not counted.
- How many, and what types of, credit accounts do you have? Although it is generally good to have established credit accounts, too many credit card accounts may have a negative effect on your score.
Some credit scoring models also consider information from your credit application – your job or occupation, length of employment, whether you own a home, etc.
Improving your credit score
In general, the following behaviors are likely to improve your credit score:Pay your bills on time and consistently.
- Keep balances low on credit cards.
- Make sure you do not use the full amount of credit available to you – leave some wiggle room.
- Maintain only a reasonable amount of unused credit.
- Do not excessively shop for unsecured credit.
- Maintain consistency in your credit applications. Use your full legal name – no nicknames.
- If you are going to close existing credit card accounts, close those you have had the least amount of time. The length of relationship with your creditors improves your score.
To learn more about your credit score, visit www.myfico.com.
For help in evaluating your credit report, take advantage of The Village Financial Resource Center's Credit Report Reading Service.
To see a Village financial counselor, call 1-800-450-4019 or contact us online.