Debtor and Creditor

Your Credit Score May Mean Big Savings or Costs

Practically everyone has heard or seen at least one advertisement urging us to get a credit report and check our credit scores. How many of us actually follow that advice? Even if you do, do you understand what your credit score actually means and and how it helps or hurts your ability to get a good interest rate on a loan or credit card? If so, you're the exception and not the rule.

Many Don't "Get" Credit Scores

In 2011, the Consumer Federation of America and VantageScore Solutions surveyed over 1,000 US consumers about credit scores, and some of the results were startling. Overall, consumers scored a 60 when it came to knowing how credit scores are determined and the negative impacts of low scores.

Details on Credit Scores

Basically, a credit score is a number that banks, credit card companies and others use to figure out your credit risk: The likelihood you'll make payments, and on time, if you're loaned money or given a line of credit. It may even impact your insurance rates or whether a landlord will rent to you.

The lower the risk, the higher the credit score, and the better your chances of reaching your goal.

The scores are based on information in your credit reports, such as how much credit you have, how much you owe and to whom, and your payment history, just to name a few items.

FICO - What Is It?

Usually, when a bank or credit card company talks about your credit score, they mean the score generated for you by the Fair Isaac Corporation - your FICO score. Your score may range between 300-850. Most consumers fall within the 600 to 700 range. A perfect score is possible, but rare.

A high FICO score (over 700) means you're a low credit risk, and the reverse if your score is below 600.

Other Scores

While the FICO score is the most commonly used, other companies have their own credit scoring system. Other than FICO, credit scores from the three major credit bureaus - Equifax, Experian and TransUnion - are often used by banks and lenders to measure your credit risk. These credit bureaus also make your FICO score available to lenders - for a fee.

What Goes Into Your Score?

Each company has its own formula for determining credit scores, but they all generally follow FICO's lead and look at:

  • Your payment history - Lenders are looking for a good record of on-time payments. Late payments - yes, even one - can hurt your score, and a bankruptcy can be devastating. However, even a stellar payment record with one blemish may be cause someone to question your score 
  • Your total credit-to-debt ratio. How many credit cards and loans you have, how much you pay each month and how much available credit you have is carefully looked at. As a general rule, the more you owe compared to your credit limit means a lower score
  • How full credit history. The longer your credit history the better the risk, especially if you've established good relationships with your creditors over time
  • Your new credit requests. Each time you apply for a loan or credit card an inquiry is made into your credit history. The more inquiries the lower your credit score goes, especially if many inquiries are bunched into a short period of time, like 14-30 days

What's Not Included?

It's important to note what's NOT considered in your credit score. For example, the survey showed that a large percentage of US consumers think age is taken into account when calculating your score. That's generally not true, and certainly not when it comes to FICO.

Also, it's against federal law for FICO, the credit bureaus or any other company generating credit scores to consider your race, color, religion, national origin, sex or marital status when calculating your credit score.

Check & Improve Your Score

Your credit score has a big impact on your financial condition. It could mean the difference between getting a credit card, car loan or mortgage with a low interest rate, a high interest rate, or not getting the loan or card at all. The higher your score, the better your chances of getting credit at a good interest rate.

Just a few percentage points in interest can mean thousands of dollars each year you can save (with a high score) or will have to pay (with a low score). Here's what you can do:

  • Check your credit reports at least once per year. It's free, and usually includes the credit score created by each credit bureau. Correct any errors on the report. This should help increase your score
  • Check your FICO score each year, too. You can get this score by paying an extra fee when you get your free credit reports, or you can get it directly from FICO, for a fee

Once you know your credit scores, take steps to improve them:

  • Make credit card and loan payments on time
  • Pay more than the required minimum payment, if possible. For credit cards, try not to carry balances. Pay them in full each month
  • If you're looking for a new loan or credit card, focus your search to few offers to limit the number of credit inquiries
  • Don't open new credit card accounts unless you need them, and close accounts you no longer need or use
  • Avoid transferring credit card balances to new cards; pay down the debt as quickly as you can

Money can't buy everything, but it sure does help when you need something. Good credit can help you get the things you need and want, and can save you money in the long run.

Questions for Your Attorney

  • What can I do if a credit card company refuses to correct an error on my credit report?
  • Does my spouse's credit score impact my credit score?
  • Are fees I pay for credit monitoring tax deductible?
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