This brief article will be included in the next Chamber of Commerce newsletter.
I titled this article to make me feel better about my SAT score. Credit scores, also called FICO scores, are arguably one of the most important pieces of information in your financial life and the vast majority of Americans don’t know their score. Lenders, landlords, insurers, utility companies and even employers scrutinize this rating, which sums up all of the information in your credit reports with three digits ranging from 300 (worst) to 850 (best). FICO scores are like your GPA of borrowing history. Your age, marital status, where you live, length of employment, salary, and debt ratio have nothing to do with your individual score.
The credit score system has been around for 45 years and is credited with making lending less discriminatory and access to credit easier and faster than ever. If your score is over 700, you will qualify for the best rates in the marketplace, because the odds are 288-1 for a 90-day delinquency. If your score is below 600 you are more than likely going to pay more for that loan, as the odds drop to 2-1 for a delinquency. On a $30,000 6 year car loan you could be talking about paying $5,000 to $9,000 more in interest charges multiplied by the number of cars in your lifetime. In this example, improving one’s credit score by 100 points can make a huge financial impact. And it doesn’t stop there. The rates you pay on your mortgage loan, credit card, insurance premiums, or whether you qualify for a job may all be based on your credit score. Imagine getting declined for a new job because your score is too low.
Your credit score is based on data submitted to the credit reporting agencies and can be grouped into 5 categories, weighted to their importance.
- 35% of your credit score is based on Payment History, and regardless of the dollar amount, it will take 24 months to restore credit with just one late pay. The good news is that over time, even a bankruptcy will not drastically impact your score, providing payments to debtors are made on time.
- 30% is based on your credit card Capacity. Maxing out your credit cards or having too many with high balances will hurt your score. Having multiple cards and showing the discipline not to use them will give you the highest score. If you have credit card debt, moving it to installment debt can help your FICO score.
- 15% of the FICO score is based on the Length of Credit. It does take time to develop a history of on-time payments. Start early in life with secured loans or a small credit card. If your parents allow you to become an authorized user on their credit card, your FICO score could benefit from this.
- 10% of your score is determined by the Accumulation of Debt in the last 12-18 months. Shopping for credit excessively or opening up numerous trades in a short time period will hurt your score.
- 10% is based on your Mix of Credit. Installment debt is always better than revolving debt and utilizing finance company loans can lower the score.
We recommend to consumers to review their credit report annually for accuracy, and if you suspect identity theft get a credit report right away. More detailed information about your credit score can be found online at http://www.myfico.com/ .
