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Credit Score – How does it work?

By Audrey Washington – 

Manhattanville School of Business  2004

Founder/ CEO – Washington Consulting Group

Signature Program – Workplace Financial Fitness® www.workplacefinancialfitness.com

Credit Score - How does it work?

Most students will think about their credit at some point during their academic life.  Whether it’s to obtain a student loan or if you find yourself with reduced income as you focus on completing your degree and are juggling your finances to stay on track.  Your credit score is a major part of the credit process and for many students, Credit Score is a mystery. 

Most of you have heard of it but don’t really know how it works and more importantly, how it impacts you.  In the early years of loans and credit, people used letters to identify a person’s credit worthiness – A, B, C, and D.   In 1989, Fair Isaac COmpany introduced the credit score model – called FICO score for their company name. 

 

There are two parts to the credit score process.  First, you have your credit history.  This is a list of your credit cards, auto loans, home loans, student loans, personal loans.  If applicable, it also lists collection accounts which include unpaid medical, cell phone and utility bills, car repossessions, liens, judgments, foreclosures and bankruptcies.  Your credit score is calculated based on the information in your credit history.  Gender, race, nationality and marital status are not included in your credit score.

How is your credit score calculated? 

• 35% = Payment History – Do you pay your bills on time? 
• 30% = Amounts Owed – How much do you owe on your accounts?  If you have a credit card with a $1,000 limit and your balance is $300 - you score higher; if your balance is $950 – you score lower.
• 15% = Length of Credit History – How long have you had credit?  If less than a year, then you may not have a credit score.
• 10% = Types of Credit Used – Do you have a mix of credit cards, auto loans, students loans or is it all credit cards?
• 10% = New Credit – Opening several credit cards in a short period of time.  If you are shopping at the mall and the salesperson asks you about opening a credit card.  If you say “yes” at 2 or more stores in the same day, this can lower your credit score.

FICO scores range from 300 – 850, the higher the better.  A good credit score is 700+ but it is possible to obtain credit with a lower score.  However, credit scores are also used for auto insurance, renting an apartment and employment.  So it is a very important number.

 

All of the three major credit bureaus – Experian, Equifax and TransUnion use the FICO score model but they are sometimes referred to as Beacon or Empirica score too.  There are different types of FICO score models that the credit bureaus use but the 5 parts of the credit score are the same.  Not all of the credit bureaus have the same information.  The creditor is the one who decides which credit bureau they will report your credit information to.  Creditors can report to one credit bureau or two or all three.  So because of this, your credit scores for each credit bureau will be different.

What’s in your credit report?

It’s very simple to find out.  Go to annualcreditreport.com and obtain a FREE copy of your credit report from all three (3) major credit bureaus.  You can obtain a free copy once every 12 months.  Review the credit report carefully and dispute any incorrect information.  You must do separate disputes with each credit bureau reporting the incorrect information.  All three credit bureaus accept disputes online.  Contact them to find out about the process to submit disputes by mail.  While your credit report is free, if you want your credit score, each credit bureau will charge you a fee.  Read the terms of obtaining your score carefully, some ask you to sign-up for a monthly service.

If you find that you need more information once you obtain your credit report, contact a HUD-approved housing counseling agency that offers budget and credit services. Use the Consumer Finance Protection Bureau’s “Find a Housing Counselor” tool.  http://www.consumerfinance.gov/find-a-housing-counselor/ . Be careful of companies that offer “credit repair” services.  Factual information on your credit report cannot be “repaired”.  You pay credit repair companies to dispute errors on your credit report.  There is nothing wrong with paying a company for this but you should know that you can do this yourself for free.  Lastly, review your credit report from all three credit bureaus each year in January as part of your “Financial Fitness” check-up.