Financial Advice

Understand Your Credit

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All About Credit Scores

When you borrow from any lender or use any company that bills you for services, paying your obligations as you originally agreed has a big impact on your future access to credit and the rates you will pay. When you apply for a loan, the lender is permitted to view your credit report on file at the major reporting agencies. These reports show how you've handled credit in the past. In exchange for access to this information, lenders are required to regularly report how you're performing on your current obligations.

All the credit reporting agencies maintain a credit score for you based on the information in your credit report. Credit scoring uses historical data across a broad spectrum of borrowers to predict the statistical likelihood that a borrower will make late payments, stop paying altogether, or declare bankruptcy. That likelihood translates into a numerical credit score. Lenders may use that score, in addition to the information on your application and other factors, to determine the loan rate you will receive, the types of loans you may qualify for, and the amount of any loans.

The use of credit scoring information can vary widely from institution to institution depending on how much credit risk they are willing to accept. Federal regulations affecting credit scores help to ensure that rates for loans are fairly assigned and not discriminatory. For example, if an institution uses a credit score to assign loan rates, everyone with that score must receive the same rate.

UFCU uses credit scores to determine the rates members receive on many types of consumer and home equity loans. The following Q & A provides more information on credit scores and how they work. You can buy a copy of your own credit report and score and research information about credit and credit reports for as little as $12.95 through myfico.com.

Q: What is a credit score?

A: A credit score is a snapshot of your credit risk picture at a particular point in time stated as a number. Credit scores can range from 300 to 830. The higher the score, the better. It changes as information is added, changed or removed from a credit report. There are many scores and score models available to lenders. UFCU uses the Fair, Isaac & Co. (FICO) score.

Q: Who calculates credit scores?

A: A credit score is calculated by the credit-reporting agency using the Fair, Isaac score model.

Q: Why do lenders use credit scores?

A: Credit scores give a fast and objective measurement of credit risk. Credit risk refers to the risk to the lender that the borrower will not repay the loan as agreed. Borrowers who make late payments or don't repay everything they owe are an expensive problem for all lending institutions. The extra costs and losses involved make borrowing more expensive for everyone.

Q: How are credit scores calculated?

A: A credit score is calculated by a mathematical equation that evaluates many types of information from a credit report. By comparing this information to the patterns in hundreds of thousands of past credit reports, the score predicts the future level of credit risk.

Q: What is in a credit bureau score?

A: Credit bureau scores are based on five main categories of information in a credit report which, added together, total your credit score. They are, in order of importance:

  1. Payment history: What is the track record? This represents 35% of the score.
  2. Amounts owed: How much is too much? This accounts for the next 30%.
  3. Length of credit history: How established is the history? This represents 15%.
  4. New credit: Is more debt being taken on? This is 10% of the total.
  5. Types of credit in use: Is it a healthy mix? This is the final 10% of your score.

Q: How can a credit score be improved?

A: Here are some tips for improving your score:

  1. Pay bills on time. Delinquent payments, collections, legal judgments, and bankruptcy all have a negative impact on a score.
  2. Keep balances low on credit cards and other "revolving credit". High outstanding debt can affect a score.
  3. Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix. It probably won't raise a score and may actually lower it.
  4. Pay off debt rather than moving it around. Also don't close unused cards as a short-term strategy to raise a score. Owing the same amount by having fewer open accounts may lower a score.
  5. Make sure credit report information is correct. It doesn't affect a score to request and check a credit report. If errors are found, contact, the credit reporting agency and the lender.

Q: What do the credit reporting agencies call the FICO score?

A: The major agencies have their own names for the score:

  • Equifax Beacon
  • Trans Union Empirica
  • Experian Fair Isaac Score