Credit Scoring

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Just as students get graded on their performance, so too do consumers get graded on their management of credit. Your credit score, a statistical summary of all of the data in your credit report, allows lenders, insurers and others to make a quick decision about your creditworthiness. Those three digits can affect your ability to secure a loan, insurance coverage, an apartment – even a job. With so much riding on your score, it’s wise to check your report well before you apply for credit. With time, you may be able to take steps to ensure your score is as high as possible.

The Recipe for a Score

The majority of your score is determined by your payment history, so paying bills on time is the best way to improve your numbers. Setting up automatic payments can help. The amount of credit you use, calculated as your credit utilization ratio, makes up another big portion of your score. For example, if you have three credit cards with a total credit limit of $15,000 and your balances on all of them total $3,000, your credit utilization ratio is 20%. The remainder of your score is shaped by the length of your credit history, new credit, balances and the types of credit used.

Raising Your Grade

If you want the power to negotiate a favorable rate on your next loan or insurance purchase, the following tips may help you keep your score in tip-top shape.

At least six months before you plan to apply for credit:

  • Keep your credit utilization ratio below 25%. It’s important to note that this number reflects your balance at the time you request the loan. Charging a big-ticket item around that time can skew the ratio, even if you intend to pay it off quickly.
  • Avoid closing old accounts. It diminishes your total credit available and can raise your credit utilization ratio.
  • Don’t open new accounts. This can look like you plan to borrow a lot of money, which could stretch your finances too thin.
  • Apply for credit within a short period. Credit scorers distinguish between a search for a single loan and applying for many new credit lines.
  • Settle all fines and tickets. An outstanding library fine or parking ticket can reduce your score if a collection agency gets involved.
  • Check your credit report for errors. Your credit score is based on the information included in your credit report, so it pays to review it for inaccuracies. Federal law entitles you to a free copy of your report once every 12 months from each of the three major credit bureaus. Your credit score is also available for an additional charge. You can contact each of the three major credit bureaus:

Equifax*

TransUnion*

Experian*

Or, save time and you order all three at www.annualcreditreport.com*, or call 877-322-8228.

In addition to helping you determine whether there are errors on your credit reports, checking at least annually will help you find out if you've been a victim of identity theft. Review the report carefully to see if someone has opened an account in your name or has made unauthorized purchases. If you've been a victim, notify local law enforcement and your financial institutions (bank, credit union, credit cards, etc.). In addition, notify the credit bureaus to put a fraud alert on your record, which will help prevent anyone else from opening new credit lines:

Equifax*: 1-877-576-5734; www.alerts.equifax.com

Experian*: 1-888-397-3742; www.experian.com/fraud

TransUnion*: 1-800-680-7289; www.transunion.com

 

Better Score, Potentially Better Loan Rates

Here's a look at how your credit score could potentially affect the rate you could get for a $20,000, 36-month auto loan in California.*

FICO® Score APR** Monthly Payment
720-850 3.583% $587
690-719 5.068% $600
660-689 7.127% $619
620-659 10.183% $647
590-619 15.039% $694
500-589 16.151% $705

* Source: myfico.com; information posted on Web site as of Dec. 2012. Your rate will depend on your personal situation, creditworthiness and the rates/terms offered by your financial institution.
** APR = annual percentage rate.

What’s In a Score?

Fair Isaac Corp.’s FICO® score is by far the most popular credit score, although it has a new competitor in VantageScore.SM Both companies use similar criteria to calculate scores.