By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]
Remember those report cards that told you (and your parents!) how you were doing in school? Maybe you thought those days were over, but they’re not. Every day, millions of people are “graded” with credit reports and credit scores.
This month, the eXtension OneOp Personal Finance Team held a webinar called Credit Scores: What’s New?
Below is a list of basic information about credit scores that military families and the financial educators and counselors who serve them need to know:
- A credit report is a summary of someone’s history of paying debts and other bills. It is prepared by credit reporting agencies (a.k.a., credit bureaus) and used to make business decisions by those who have a legitimate need for the information. The three major credit bureaus are Equifax, Experian, and TransUnion. A good analogy for credit reports is report cards at elementary schools that provide a detailed summary of students’ performance.
- Credit scores are typically a number calculated by statistical analyses to measure the risk that a borrower will become delinquent or default. It is a weighted average of factors that have been shown to be related to the creditworthiness of individuals. The higher a person’s credit score number, the better. A good analogy for credit scores is a grade point average used to measure college students’ academic success.
- The most commonly used credit score is the FICO score, which ranges from 300 (low) to 850 (high). The average FICO credit score in the U.S. in early 2015 was 695 according to Fair Isaac Corporation, the FICO score creator.
- The better your credit score “GPA,” the better your chances of obtaining a loan or credit card and obtaining lower-cost credit that can save hundreds, or in the case of home mortgages, thousands of dollars of interest over the length of a loan. Credit scores are also used in setting rates for insurance policies. In addition, potential landlords can use them as a character reference.
- The most important factor in a person’s FICO credit score is bill payment history, which is weighted at 35% of the total score. Other key factors are the amount owed (30%), the length of a person’s credit history (15%) , the number of recent credit inquiries (10%), and the mix of types of credit (e.g., credit cards, auto loan, mortgage, etc.) used (10%).
- There is no federal law on the books (yet) that mandates free credit scores upon request like there is for credit reports. However, many credit card companies now provide free credit scores on monthly statements or online as a way to attract and retain customers. Examples of companies that provide free credit scores include Barclaycard US, Capital One, Citibank, Commerce Bank, Discover, First Bankcard, and USAA.
- Another way to get a free credit score is for persons applying for a car loan, mortgage, or home refinancing to simply ask their prospective lender for this information. Especially for mortgages, lenders have probably already charged loan applicants a fee to check their credit score.
So, if you thought your report card and GPA days were over, think again. Your credit report and credit score are a “snapshot” of your credit history at a particular point in time and you are constantly being “graded.” Paying bills on time and not becoming overextended are the two best ways to raise your credit score.
For more information about credit scores, take the Credit Score Quiz.