Credit Score: understanding the number
Cholesterol, blood pressure, glucose, credit score…all numbers that mean nothing unless someone explains what is good and what is scary. Just like a doctor breaks down why your cholesterol level should be below 200, we’re here to explain what an ideal credit score could be. And you don’t even have to cut cheese out of your diet.
Your credit score (the most popular being the FICO® Score named after the organization that created it — the Fair Isaac Corporation‡) can range from 300 to 850 because it’s an adjusted scale. (You get 300 points just for having a credit history…so most adults have a higher score than 300 just by being “on the grid.”) In case you’re afraid to get the pronunciation wrong, FICO is pronounced “f-eye-ko,” like “psycho.”
Why does it matter? If you’re ever going to purchase a house or car or apply for a job, lenders and potential employers will be checking your score to assess your reliability and financial history.
While there are some schools of thought that advise consumers not to obsess over credit scores, the most popular being financial author and radio host Dave Ramsey‡, the FICO Score is a factor in 90 percent of lending decisions in the United States. And many in those anti-credit score camps still encourage you to be aware of your credit reports to check for errors and work on problem areas.
Most important step: check your score and your reports! Even if you’re worried because of past mistakes with late payments or credit card debt, it’s better to know where you stand and start taking action. No ostrich-like behavior!
Good news—unless you’re within the 7 percent of the nation with a score between 350 and 549 (and if you are, stop reading this post and call a credit counselor‡), there is no need to stress. At a score of 550 or more, you can sometimes qualify for a loan. Your motivation for raising it as high as possible will be to get the best interest rates.
Most creditors consider a score above 700 to be acceptable to give a consumer the best rates. If your score is below 700, here are some tips that can help you bring it up. You may be surprised how quickly you can make a change (1-3 years instead of the 7-10 years it takes to start fresh after declaring bankruptcy).
How to raise your score:
1) Understand how the score is decided
In order of greatest to least weight:
- Payment history – Did you pay all your bills on time? This includes student loans, car payments, credit card bill, etc.
- Amount owed – for example, you still owe $10,000 before you can pay off your car, $15,000 in student loans and $500 on one of your credit cards.
- Credit history length – something positive about getting older! The longer you have a credit history, the higher your score rises.
- New credit – did you recently open a slew of store credit cards in order to get a discount on a shopping spree? You may be paying for it in the form of a lower credit score.
- Type of credit used – Credit bureaus look at mortgages vs. auto loans vs. student loans vs. credit cards. Some are better for your score than others.
2) Stay on top of your bills
The best way to improve on your credit score is to pay your bills on time. Have a steady income and live within your means so your bills don’t pile up until you’re completely buried in credit card and loan debt.
3) Ask about your custom credit score
Lenders might also look at your custom credit score in addition to your traditional credit score. A lender will use your custom credit score to get a closer look at the risk factors that are related to what you are trying to fund with the line of credit.
4) Discuss internal credit scoring
Not every creditor is required to report your credit. Some major lenders use their own internal credit scoring systems to help them make a decision. Lenders use these internal scores to predict future behavior of their customers. When you answer questions on the loan application form, the responses will go in to creating a custom score for you.
5) One size doesn’t fit all
What makes you appealing to one lender will not make you appealing to all. If your credit has been damaged, be sure that any new information is reported to credit agencies.
6) Pay the minimum
If you can’t pay the entire balance of a credit payment, at least pay the minimum due. Paying the minimum will keep your credit score from dropping even lower than it would if you don’t pay the bill at all.
This video from the Federal Trade Commission’s website does a great job at explaining why you need to check your report and how to do it.
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Ms. Stokes is a senior vice president and director of Private Banking at UMB. She is responsible for driving sales and relationship management activities. She works closely with the Wealth Management leadership team and regional presidents to grow business and helps to develop roles in wealth management, relationship management and presentation skills. She joined UMB in 2009 and has more than 30 years of experience in the financial services industry. She earned a bachelor’s degree in business administration from the University of Missouri- Kansas City and a Bachelor of Arts from the graduate school of retail banking.