Credit Score Education
Commonly Asked Questions Regarding Credit Scores
When it comes to credit score, there are several excellent sources of accurate information that you can use to learn how to establish, re-establish, and utilize your credit score. While there are many tips below for you to consider, we encourage all of our members to learn as much as they can about credit and how it can affect their lives.
As a financial institution it is our goal to make everyone, member and non-member alike, to be confident in their financial knowledge in order to achieve their financial goals. We are always here to help by answering question and coming up with ways to improve your financial health.
What is a credit score?
A credit score is a number that summarizes the historical credit information on a credit report. The number reflects the likelihood that you will become delinquent on a loan or a credit obligation in the future.
Why don’t I have a credit score?
Credit scoring models cannot generate a score without enough credit information. If you have little or no credit history, you probably will not have a credit score available.
How often do credit scores change?
Your credit score changes as your credit report changes. Therefore, it can change often since new information is added to your credit report all the time.
How are Credit Scores calculated? According to Experian, one of the three major Credit Bureaus, the following formula is typically used when calculating a credit score:
35%: Payment history - Tip: Try to make sure you make all your payments on time
30%: Amounts owed on credit and debt - Tip: Try to keep the balances you owe to others as low as possible
15%: Length of credit history - Tip: Try not to close out revolving credit types if you are currently not using them
10%: New credit - Tip: Try not to open too many new types of credit at the same time
10%: Types of credit used - Tip: Try to keep your types of credit varied between revolving, secured, and unsecured
What is the credit score range and is a “good” score?
While there are many different types of credit score, and the ranges differ for each one, for a score with a range between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750. Higher scores represent better credit decisions and can make creditors more confident that you will repay your future debts as agreed.
Is there just one credit score?
One of the most common myths about credit scores is that there is only one credit score. Web sites or financial advisers who claim there is only one “real” credit score either are misinformed or are being misleading. In fact, there are many different credit scores used by lenders (according to some estimates, more than 1,000), although some scores are used more than others.
What information goes into calculating a credit score?
Credit scores use information from three key areas of your credit report: account information (such as credit cards, auto loans, student loans, mortgages and rent), public records (such as tax liens or bankruptcies) and inquiries (requests by lenders to view your credit). Information such as race, gender, where you live and marital status are not used in credit scores.
Will I be penalized for shopping around for the best interest rate?
Too many inquiries may have a negative impact on your credit score. However, most recently developed credit scores recognize when a consumer is shopping for the best rates and either ignore multiple inquiries or count them as only one inquiry if they occur within a specific period of time. In such cases, shopping around will have little or no impact on a credit score.
Do lenders and creditors look at all three credit reporting agency reports and credit scores calculated using information from each report before approving a credit or loan application?
Not always. Most mortgage lenders will look at reports from all three credit reporting agencies and credit scores calculated using information from each, but other lenders may use reports and scores from two or just one of the credit reporting agencies.
Does having too many credit cards affect a credit score?
Having too many credit cards with either high balances or large amounts of credit available can negatively impact risk scores, depending on the overall credit history.
Does cosigning for a loan affect a credit score?
Yes. By cosigning, you are accepting full responsibility for the debt if the other person does not pay as agreed. A cosigned account will appear on both your credit history and the other person’s. All loans and credit card accounts that appear on your credit report will impact credit scores.
Do late payments affect a credit score?
Paying bills on time is generally the single most important contributor to a good credit score. Being late on any bill, for any length of time, is a possible indication of future nonpayment of debt and is almost always viewed negatively by lenders. Any late payments will remain on your credit report for up to seven years.
Do inquiries affect a credit score?
Inquiries placed on your credit report when you apply for new credit can impact your credit score. However, inquiries have a relatively small impact on your credit score. In a credit scoring model, there are stronger indicators of future payment performance, such as past payment history and use of credit. Inquiries are rarely, if ever, the only reason for poor credit scores. They become significant only if there are other issues already lowering your score, such as late payments or very high debt.
Who, or what decides if I get my loan?
Banks, credit card companies, auto dealers, retail stores and other lenders decide if you get your loan. Most businesses that issue credit or loans use credit scores to quickly summarize a consumer’s credit history, saving the need to manually review an applicant’s credit report and providing a better, faster decision. Although many additional factors are used in determining whether or not you receive the credit you applied for — such as an applicant’s income versus the size of the loan — a credit score is a leading indicator of one’s basic creditworthiness. Credit reporting agencies do not make lending decisions.
What is important to remember when trying to build your credit score?
Do obtain a copy of your credit report from Annual Credit Report . This is particularly useful if you are trying to rebuild your credit, as you’ll want to review what existing debts you need to satisfy before moving forward. If you have a Premium Checking account with FFCU, you also get access to all three of the major Credit Bureau reports every 90 days along with your score! See our ID Protect Page for more information.
Don’t apply for too much credit at once. This can appear as though you’re desperate for credit and perhaps make lenders less inclined to extend credit to you. Further, too many credit inquiries can have a negative impact on your credit score.
Do apply for a variety of credit types. Credit scoring models value having different types of credit. Therefore, having some revolving accounts (typically credit cards) and some installment fixed payment loans (such as a car payment) can improve your score.
Do research the type of card that is right for you. Each issuer has different lending standards (yes, a credit card is a loan), so you’ll only want to apply for cards from those whose lending profile you fit. Familiarize yourself with the various standards by going to CreditCards.com or Bankrate.com.
Don’t fall for a credit repair scheme. Why pay for something that you can do for yourself for free? If rebuilding credit, know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has. Follow with responsible behavior with your new credit, and you’ll soon have a solid credit file.
Don’t pay to piggyback. Piggybacking is a legitimate way to build a credit history, but only if you use it as it was intended. This tool allows someone with existing credit to add an authorized user to their account. The credit activity is then reported in the primary cardholder’s name as well as the authorized user’s name. Examples are adding a young adult on the parent’s card, or a spouse on the other spouse’s card. The wrongful use of piggybacking would be when strangers utilize this method, typically for money.
Do consider a co-signer. Obtaining a loan in the absence of any credit history can be difficult, sometimes requiring a co-signer to guarantee payment. The loan is usually structured where the primary borrower is expected to make the payment, with the pay history reported in both names. If the borrower defaults, the lender will approach the co-signer, and missed payments will be reflected on both credit files. There is somewhat of a risk to the co-signer, but if handled responsibly, co-signing can be an effective way to help another person obtain and build credit.
Do consider a secured credit card. This type of account is secured by a deposit made to the financial institution issuing the card. For example, if you wanted a card with a $500 limit, you would deposit that amount with the bank offering you the card. Know, however, that secured cards can have fees attached to them, and typically have a higher interest rate. The account activity is reported to the credit bureaus each month, and after responsibly making payments on a secured card, the issuer often offers the borrower an unsecured card.
Do take out a small loan. A personal loan from a bank or credit union can serve to establish credit. You may be asked to put up collateral, but it will be worth it in order to build your credit. Equally as important as establishing credit is treating it responsibly. Pay your bills on time all the time and you’ll enjoy all the benefits of credit.
There are many excellent sources that offer credit score education, below are just a few that we encourage everyone to review.
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