Know the Score – Albuquerque Journal
Because interest rates are low, credit companies may make tempting offers to entice you into taking out a loan or getting a credit card. Take your time to make a decision that is right for you and your financial health before going ahead with such offers.
What is a credit score?
A credit score is a three-digit number that summarizes information on your credit report. The number changes depending on what is happening in your financial life.
There are two different names for credit score, FICO or VantageScore. The FICO score is named after the company that invented this three-digit scoring system in the mid-1980s, Fair Isaac Inc. The three major credit reporting agencies created their own scoring system, called VantageScore, designed to produce a more consistent score across all three credit reporting agencies. Each credit reporting agency collects different financial information about you and therefore reports a different credit score.
Credit scores are designed to estimate your likelihood of repaying a debt.
What are the ranges?
• A score of 720 or higher is generally considered excellent credit.
• A score between 690 and 719 is considered good credit.
• Scores between 630 and 689 are fair credit.
• And scores of 629 or less are bad credit.
Other sites had different ranges and names with similar messages about the meanings.
What factors come into play?
• Pay bills on time. Any late payment can affect your score. Late payments of 30 days or more stay past due in your credit history for years.
• How much you owe. Just because you have a high credit limit on your credit card doesn’t mean you should use it. The sites I looked at recommended using 30% or less of the credit limit. Lower is better.
• Credit age. The longer you have credit, the better your score.
• Composition of credit. Having more than one type of credit such as a loan and a credit card.
• How long ago you applied for credit. When you apply for credit, an investigation is done on your credit file and may cause your score to drop temporarily. For example, applying for a new credit card that offers airline miles, cash rewards for signing up, or other incentives could negatively affect your credit score.
What does this really mean?
The score can affect your approval for a loan or credit and the interest rate you pay on the loan. People with high scores generally receive lower interest rates on mortgages, credit cards, and loans because they are considered to be at low risk of default. Average scores will likely qualify for new credit, but not ideal rates. Low scores mean a damaged credit history, such as defaults on different types of credit. It can also be the result of bankruptcy, which stays on a credit report for seven years.
Start small. Your bank, credit union, or other financial institution with which you have an account may offer you a credit card. When you are approved for a loan or credit card, make payments on time and in full. Credit is also established by paying your utility bills on time.
Watch your score
According to the Consumer Financial Protection Bureau, there are four main ways to get a credit score. (See the government website below for additional links.)
1. Check your credit card or other loan statement. Many credit card companies and loan companies provide credit scores on monthly statements or by logging into your account.
2. Talk to a nonprofit advisor. Nonprofit credit counselors and HUD-licensed housing counselors can often provide you with a free credit report and score and help you review them. (I couldn’t find a New Mexico nonprofit credit counselor on the website, but I did find Housing Counselors for New Mexico.)
3. Use a credit score service. Many services and websites advertise a “free credit score”. Review them carefully, as you may be charged a fee for ongoing monitoring.
4. Buy sheet music. You can buy directly from credit reporting companies. Know what you are buying and acknowledge efforts to sell additional products or services.
Obtain and review your credit report:
You are entitled to a free copy of your credit report every 12 months from each of the three national credit reporting companies. It is important to review your credit reports, which you can do free of charge at www.AnnualCreditReport.com. If there are errors in your credit reports, they can unnecessarily lower your scores. You can submit information to correct errors.