Understanding Your Credit Score

For last week’s Senior Professional Practice we invited Julie Nelson Meers, a VP from MO Bank, to speak to students about banking, loans and credit. Here it what Julie has to say about understanding your credit score.

Understanding Your Credit Score 

 Keeping good credit is critical and relatively easy with a little knowledge.  Good scores range from the 720 to 850 range.  If it’s below that, you may have some work to do.

 Who Reports Your Credit:

There are three credit reporting companies.

 Equifax                                Experian                         Trans Union

P.O. Box 740241            P.O. Box 2002                P.O. Box 1000
Atlanta, GA 30374           Allen, TX 75013              Chester, PA 19022
800-685-1111                1-888-397-3742             800-888-4213

The 3 agencies are competitors of each other, and do not normally share their credit information except in special cases.  Credit agencies gather their consumer credit information by soliciting creditors such as credit card companies, banks, and lenders to join their systems and contribute their credit experience on consumers to the systems. In return for submitting information to the systems, creditor members may use the system to obtain credit information on consumers to approve credit decisions or review existing consumer accounts.

Each agency typically reports a slightly different credit score for the same consumer.  Although the scores will be similar, there can be a 40+ point spread between the lowest and the highest score reported.  Many lenders will order all three reports and average the 3 scores.

It is a good idea to check on your own credit scores, however, the credit agencies do not necessarily report the same score to lenders as they do to you.  It will be close, but may not be exact.  Yes, this does make it confusing.

Still, knowing an approximation of your credit score(s) allows you to make adjustments as necessary.

 The Perfect Mix of Credit:

Key is to have as much high quality credit as possible, with a good blend of revolving and installment debt.

  • For new credit users (0-1 year):  1-2 major credit cards
  • For semi new credit users (1-3 years):  2-3 major credit cards, and an auto loan
  • For seasoned credit users (3-7 years):  2-3 major credit cards, an auto loan and a mortgage
  • Anything beyond 7 years:  As much good credit as you want!

Hard and Soft Inquiries and how they impact your score.

From a creditor’s point of view, consumers who have excessively shopped for credit in the past 6-12 months may be trying to spend beyond their means, making them a higher credit risk.

  • Soft inquiries:  DO NOT affect your credit score.
    • Example:  you pull your own credit
    • Account review by a creditor
    • Promotional Inquiry
    • Employer Inquiry
    • Applying for auto insurance
    • Landlord checking your credit.
  • Hard Inquiries DO affect your score.  They can cost anywhere between one and 20 points.  They remain on your report for 2 years and will affect your score for 1 year.  This occurs when you apply for a loan, a credit card, or any type of credit.
    • Applying for a mortgage or home equity line of credit
    • Applying for an auto loan
    • Applying for a credit card
    • Applying for a student loan
    • When you fill out and return pre-approved credit offers that you receive in the mail
    • Applying for instant credit offers at the shopping mall
    • Applying for credit on the internet
    • When you opt to become pre-qualified for any type of loan.

Other Factors That Can Damage Your Score:

  • Repeated late payments (three or more a year can knock your score down 200 points or more!)
  • Maxing out credit cards – using more than 50% of your credit available on any one account can deduct you 100 points.  Ideally, you’d have 90% of your credit available.
  • Closing old cards can be bad because it will lower the amount of credit you have available (see our last point) and also could erase some of your good credit history.
  • Be careful with AMEX cards because most do not have a credit limit.  The scoring system will use last month’s statement total as your available credit limit.  Pay your bill before the statement date, without exception.

Tips for Improving the Payment History Factor

  • Verify the data being reported
  • Pay all your accounts on time
  • When transitioning to a new mortgage loan, don’t count on escrow to pay the final mortgage payment of a previous loan.  A single 30-day mortgage late report can cost you 80 points.
  • Some creditors do not report until you are 60 days late.  If you know you are not going to be able to pay on time, call each creditor to find out if they report at 30 days or 60 days so you can decide which cards to pay first.
  • If you forget or miss a payment, get current asap.
  • If you cannot manage your credit due to unforeseen circumstances, contact your creditors and negotiate different payment terms, a lower interest rate, or some other arrangement.  Never just let it go.
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