Your Credit Rating

Credit Scores Explained

What is a credit score and what is it designed to do?

FICO score Summary of one’s credit worthiness Fair, Isaac and Co—the California company

that developed the system Represents the info in your credit report by

using a formula to calculate a single number Gives lenders a fast, accurate prediction of

the risk involved in giving you a loan Scores range from the 300s to 900s

The higher the score the better Majority of people fall between 600s and 700s

What factors determine my credit score?

5 Characteristics listed in order of significance determine how high a score will be1. Past delinquency

2. The way credit has been used

3. The age of a credit file

4. The number of times a person asks for any type of credit

5. A customer’s mix of credit

1. Past Delinquency

People who have failed to make payments in the past tend to do the same in the futureUniversal Default Clause

A hike in your APR because you were 30 days late—did not pay until you received your next statement

2. The Way Credit Was Used

Someone who is maxed out or close to the limit on a credit card(s) is considered a greater risk than someone who does not look at a high credit limit as a license to print money

3. The Age of the Credit File

Fair, Isaac’s model assumes people who have had credit for a long time are less riskyMore of a history to compare

4. Number of Times a Person Asks for Any Type of Credit

The system frowns upon those who have initiated several requests for credit cards, loans, or other debt instruments over a short periodThis includes store credit cards that

offer same day discounts or free gifts Even if the card is never used it affects

your credit rating

5. A Customer’s Mix of Credit

Someone with a secured credit card is generally riskier than someone who has a combination of installment and revolving loans Installment loans

Auto loan—make fixed payments until loan is paid in full

Revolving loans Charge cards—each payment frees up

more money to access

How is credit worthiness gauged using the credit score? It depends on the type of loan the

consumer is seeking More weight is given to different credit

factors For example, the number of open credit

cards influences your credit score because a person would be able to borrow up to the credit limit on each card.

5 Store Credit Cards X $1000 credit limit on each card would enable a person to owe up to $5000. Which also means they would have a monthly payment for each card.

If a person is applying for a car loan, the total amount of monthly payments would influence whether a person could financially afford to make the additional monthly car payment.

Mortgages FICO scores of

Above 660—acceptable Loan files need only a basic review, the

lowest interest rates applyBetween 620 and 660—uncertain

Thorough review of borrower’s entire credit history to determine cause of rating (mix of credit, open credit cards)

Below 620—high risk Makes traditional financing difficult to

obtain, credit could be denied, need for a co-signer or a larger down-payment, higher interest rates would apply

Credit Cards

Additional weight is placed on credit card related informationHow many times a person missed

a revolving credit paymentWho the borrower is

A college student targeted for a starter card

A platinum-toting stockbroker with a summer home in the Hamptons

Auto Lenders

Focus on deal characteristicsAmount of down paymentBorrower’s debt-to-income ratioLength of time at one jobPast performance on similar types

of loans Missed Nissan payment might be more

important than a late Visa bill payment

Why would knowing your score help?

“A mortgage is probably the single biggest transaction most people make in their lives.” *

Excellent rating gives you the best interest rates available

This won’t happen if the 1st time you look at your credit rating is when you have the contract in your hands and the clock to closing is already ticking

3-6 months ahead of time gives you ample time to make changes to improve your credit rating

*Eric Cunliffe, former president and CEO of HomeSpace Inc. now a division of Lendingtree.com

What will it cost to order your credit report and scores?

If you have been recently turned down for credit, you may be entitled to a FREE report

Charged to your credit card

EVERY month until you cancel

What will it cost to order your credit report and scores?

Your credit report is a snapshot of your credit at a particular moment in time. However, in reality that information is flowing in and out of your credit report all the time. Credit applications, home and auto loans, payments, an address change or even an inquiry from a prospective creditor all show up on your credit report - and affect your credit score.

Credit history is the main determining factor of credit nowadays, but there are potential problems that can work against consumers. Since some credit reports can contain inaccuracies serious enough to cause consumers to be denied credit, a loan or even a job, keeping abreast of changes to your credit file is vitally important.

Monitoring your credit is one of the easiest and most effective ways of protecting your credit against errors and fraud.