The first step to interpreting a score is to identify the source of the credit score and its use. There are numerous scores based on various scoring models sold to lenders and other users. The most common was created by Fair Isaac Co. and is called the FICO score. FICO produces scoring models that are most commonly used, and which are installed at and distributed by the three largest national credit repositories in the U.S (TransUnion, Equifax and Experian) and the two national credit repositories in Canada (TransUnion Canada and Equifax Canada). FICO controls the vast majority of the credit score market in the United States and Canada although there are several other competing players that collectively share a very small percentage of the market.
In the United States, FICO risk scores range from 300-850, with 723 being the median FICO score of Americans in 2010. The performance definition of the FICO risk score (its stated design objective) is to predict the likelihood that a consumer will go 90 days past due or worse in the subsequent 24 months after the score has been calculated. The higher the consumer’s score, the less likely he or she will go 90 days past due in the subsequent 24 months after the score has been calculated. Because different lending uses (mortgage, automobile, credit card) have different parameters, FICO algorithms are adjusted according to the predictability of that use. For this reason, a person might have a higher credit score for a revolving credit card debt when compared to a mortgage credit score taken at the same point in time.
The interpretation of a credit score will vary by lender, industry, and the economy as a whole. While 620 has historically been a divider between “prime” and “subprime”, all considerations about score revolve around the strength of the economy in general and investors’ appetites for risk in providing the funding for borrowers in particular when the score is evaluated. In 2010, the Federal Housing Administration (FHA) tightened its guidelines regarding credit scores to a small degree, but lenders who have to service and sell the securities packaged for sale into the secondary market largely raised their minimum score to 640 in the absence of strong compensating factors in the borrower’s loan profile. In another housing example, Fannie Mae and Freddie Mac began charging extra for loans over 75% of the value that have scores below 740. Furthermore, private mortgage insurance companies will not even provide mortgage insurance for borrowers with scores below 660. Therefore, “prime” is a product of the lender’s appetite for the risk profile of the borrower at the time that the borrower is asking for the loan.
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 then 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 thirty-year mortgage loan and their FICO 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 30-year lifetime. Your credit scores do matter.*Interest rates are subject to change. These rates were offered by lenders in 2005.|
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.
Five Parts to Your FICO 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
FICO scores 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 your credit history – about 15% of a FICO score
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|
|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.|
Learn Your Scores Soon
It’s now easy to get your credit scores to check your financial health. Different sources provide credit scores to consumers via the Internet, telephone or U.S. Mail. For most scores, you will need to pay a small amount. You also will be asked to prove your identity to make sure your financial information isn’t given to the wrong person.
Here are recommended places you can get your scores:
|ANNUAL CREDIT REPORT SERVICE
Congress recently established this outlet to make it easier for consumers to get their credit reports and credit scores from the three national credit reporting agencies.Web:www.annualcreditreport.com
Phone: 1 877 322 8228
Annual Credit Report Request Service
P. O. Box 105281
Atlanta, GA 30348-5281
|The price for credit scores is being determined by the Federal Trade Commission Credit Reports and Scoring.One free credit report per year from each credit reporting agency.||Each credit reporting agency offers a different type of credit score to consumers.||FICO score via:
Experian score 330-830
TransUnion score 150-934
The consumer Internet site of Fair Isaac Corporationwhich developed the FICO score.Web: www.myfico.com
|$14.95 for one FICO score and credit report. $44.85 for all three FICO scores and credit reports from the three credit reporting agencies (2005 pricing).||This score is most often used by lenders. It lets you see how prospective lenders would evaluate your credit history.||FICO score from Equifax, Experian and/or Trans Union 300-850|
|INDIVIDUAL CREDIT REPORTING AGENCIES:Equifax
Phone:1 800 685 1111Experian
Phone:1 866 200 6020TransUnion
Phone: 1 800-888-4213
|Prices for credit scores with credit reports vary from $14.95 to $34.95 (2005 pricing).||Each credit reporting agency offers a different type of credit score to consumers.||FICO score via:
Experian score 330-830
TransUnion score 150-934
|MORTGAGE LENDERS||Credit Score is free when applying for mortgage or home equity loan.||This score will likely be the actual score used to evaluate your application. Ask your lender to be sure.||FICO score from Equifax, Experian or Trans Union 300-850|
Meet Vera, A Single Mother
|Behavior of action||Change in score||Vera’s current FICO score|
Vera and husband Dave have been married for 10 years. They have one daughter April, age 4. Financially they are making payments on time for two car loans, one mortgage and four credit cards which have low balances. But sadly, their marriage has deteriorated and they agree to divorce. In the settlement Vera retains custody of April. Dave takes one of the cars and responsibility for its loan. He also takes two of their four credit cards, and agrees to pay 50 percent of the monthly mortgage payments.
Dave struggles financially following the divorce and runs up his two credit cards to nearly their limit. Vera doesn’t realize her name is still on the card accounts Dave is using.
Dave continues to struggle and misses payments on both cards. Both cards still are nearly maxed out.
Vera gets a call from her bank about the missed payments. Once she understands what has happened, she contacts Dave and asks him to roll over the balances on both cards to a new card that he opens in his name only, which he does. Paying off the two accounts improves her score.
Vera continues to manage her money carefully, paying her bills on time and keeping her two card balances low. Meanwhile the two missed payments get older on her credit file and have less impact to her score. Dave lands a better job and makes his part of the mortgage payments on time.
Vera’s car breaks down. Since she relies on it to get to work and to take April to preschool, she has no choice but to have it repaired. To pay the garage she maxes out one of her credit cards.
Since Vera needs a reliable car, she asks her bank about auto loan rates. They tell her that her credit score is too low to qualify her for their best rate. Since money is tight, she waits to buy a car.
Vera has steadily paid down her high credit card balance and monitored her score. When her score has improved, Vera applies and is approved for an excellent rate on an auto loan. She buys a used car and feels good about how she has managed her credit.
Now Meet Don and Doris
|Behavior of action||Change in score||Don and Doris’s current FICO score|
Don and Doris are married and in their 50s. They have twin sons who graduated from college a year ago, have good jobs and live in different states. Don and Doris have been managing their money carefully for 30 years. They are making payments on a mortgage, three credit cards with large balances, and a $50,000 bank loan that paid for their sons’ college. Now that their sons are on their own financially, Don and Doris focus on paying down their credit card balances by making larger monthly payments and using their cards sparingly.
After a year of steady payments, their credit card balances are significantly lower. They continue to manage their credit well and haven’t opened any new accounts.
The couple decides to go on an extended vacation, taking leaves of absence from the jobs to so they can tour the U.S. in a motor home. They buy their motor home with help from a new bank loan at a favorable rate, thanks to their good credit scores. But opening the new loan lowers their scores a bit. Since their plans will keep them on the road for three months, they put one of their sons in charge of paying their monthly bills.
They have a wonderful vacation. When they return, they find they had neglected to tell their son about the bank loan. He didn’t open the invoices they received from the bank thinking they were monthly account statements. Now their bank loan payment is 60 days late.
Doris calls the bank, explains the mix-up and sends in the overdue payments immediately. A couple of weeks later their bank conveys their new account information to the credit reporting agencies, where it is available to influence their credit scores.
After six more months of on-time payments, their credit scores have steadily improved. Although the late payment will remain on their credit reports for seven years, it will impact their scores less as time passes. Don and Doris are on track once again to regain their good FICO credit scores in the 700s.
|* Don and Doris have separate FICO score, but in this example, they would rise and fall together.|
|1.||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.|
|2.||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.|
|3.||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.|
|4.||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.
- Pay off 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 accuracyand 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.
|Improving your credit scores can help you:|
This publication has been prepared by Consumer Federation of America and FICO, and was reviewed by the Federal Citizen Information Center. These materials may be reproduced for educational purposes only.
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The content provided on this website is presented or compiled by Joel Lobb and is provided for informational purposes only. It does not necessarily represent the views or opinions of Key Financial Mortgage .Neither Joel Lobb nor Key Financial Mortgage assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information disclosed, or represents that its use would not infringe privately owned rights.
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Joel Lobb is a Licensed Mortgage Originator: NMLS #57916. Key Financial Mortgage NMLS # 1800 is a licensed Mortgage Broker Company in the State of Kentucky
This web site is not the FHA, VA, USDA, HUD or any other government organization responsible for managing, insuring, regulating or issuing residential mortgage loans.
All approvals and rates are not guaranteed, and are only issued based on standard mortgage qualifying guidelines.
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