Understanding Your Credit

It’s easy to ask, "Why do I need to know my credit score?" Research shows that nearly half of American adults don’t know their credit score—and more than 60% of adults between 18-34 (sometimes called the "millennials") don’t know it. What’s more, an even higher percentage of adults of every age have no idea what they can do to improve their scores.

Most financial institutions use a standardized credit score when evaluating a credit application. What you may not know is that others, such as a landlord, insurance company, or even an employer, may also use your credit score as a basis for providing services to you, so managing your credit responsibly will affect the prices you pay for other necessities of life.

Your credit score is called a FICO score, although the three major credit reporting agencies (Equifax, Experian and TransUnion) may each refer to it by a different name.

What is a FICO Score?
The FICO score ranges between 300-850, with higher numbers indicating a better score. Typically, the higher your credit score, the lower your credit risk to a potential lender. Therefore, you have more options when shopping for the best rates, saving you thousands of dollars in finance charges over your lifetime.

What's considered a good score?
About 60% of us have credit scores of 700 and higher. The goal is to have a credit score of 720 or higher. If your score is 720, lenders usually put you in the same category as borrowers with the highest scores. You are viewed as a safe risk and typically receive a loan at a low interest rate. Although it is important to continue to maintain a strong repayment history and credit score, you shouldn’t worry too much about trying to improve it further as it will have little affect on your ability to obtain credit.

The score is created by a mathematical formula that considers many different variables on your credit file—which is why the score can be different for each of the credit reporting agencies. Most financial institutions in the Northwest, including , primarily use the Equifax credit score. On real estate loans, your credit score from all three major credit reporting agencies (Equifax, Experian and TransUnion) are often pooled together to evaluate your creditworthiness.

What goes into my credit score?
Your score is based on the following five major factors, although each major factor may contain smaller components:

• 35% Payment History - A history of making payments on time, not missing payments, length of time since last late payment, etc.
• 30% Amounts Owed - What do you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk
• 15% Length of Credit History - How old is your oldest account, what is the average age of all accounts, etc.
• 10% New Credit
• 10% Types of Credit - Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered.

How do I find out my credit score?
You can receive a free copy of your credit report once every 12 months from each of the nationwide credit reporting companies - Equifax, Experian and TransUnion.

For instant access to your free credit report, visit www.annualcreditreport.com or call (877) 322-8228.

In addition, FICO has a website called www.myfico.com. This website will also offer you all of three credit scores for a nominal fee.

Here are links and contact information for the three credit reporting bureaus:

Equifax
(800) 685-1111
www.equifax.com

Experian
(888) 397-3742
www.experian.com

Trans Union
(800) 916-8800
www.transunion.com

How do I increase my score?
Although you cannot raise your score overnight, you can do so fairly quickly. The scoring formula gives more weight to recent activity. So, even six months of “good behavior” will have an impact, demonstrating that you have cleaned up your credit behavior.

Because payment history comprises the largest part of your FICO score, making
a habit of paying bills and making your payments on time is going to have the largest positive impact.

Also, the fastest way to improve your score is to pay down balances. Remember, FICO scores reward people who use a smaller percentage of their available credit. Some suggest never using more than 50% of your limit on any card.

Avoid opening a lot of new accounts at once. This makes lenders uneasy, particularly if you do not have a long credit history. Many recommend not having more than five credit cards. If you decide to close some credit accounts, close the newer accounts first, and avoid closing more accounts than necessary because this lowers loan capacity. It is generally better to leave the account open and cut up or put away the credit card.

Rotate and use all of your cards. A dormant credit account will not help your score. If you do have a late payment, it is worth a call to the lender to see if they will remove this information from your records. You can also choose to dispute the late payment. While it is in dispute, the item will stay on your credit report but not factor into your FICO score.

While there is no question that having a good credit score is essential, it is also important to point out that FICO scores do not take into consideration your age, income, assets or employment history.

For more information about credit scores and how to manage them wisely, visit the following websites:

• Educational Articles from MyFICO.com
• Credit Score Page - Wikipedia
• Equifax's Educational Resources