Know Your Credit Score

(This article appeared in the May/June 2010 issue of The American Postal Worker magazine.)

Joyce B. Robinson, Research & Education Department Director

Credit card companies and lending institutions are tightening their approval standards, making it harder for people with low credit scores to get new lines of credit. Everyone should know their credit score, which is the number used by credit-card companies, lenders, and even many landlords, to assess a borrower’s reliability.

Credit scores are based on data credit bureaus have about an individual’s financial history. The three major credit bureaus, Equifax, Experian, and Trans Union, worked with Fair Isaac and Company (FICO), a financial analysis group, to develop the scoring model. An individual’s credit information is also referred to as a “FICO” score.

FICO scores range from 375 to 850 points, with higher scores indicating better credit. Most people score between 600 and 700. Ratings above 700 are very good; only about 11 percent of the population have scores of 800 or above. Those with good scores get better interest rates and higher credit limits. If your score is below 600, lenders may charge you higher interest rates, or may deny your application.

What Factors Influence a FICO Score?

•  A FICO score is based on information drawn from your credit report. Factors used to determine the score include: 
• Payment history – Are there frequent late payments, a history of bankruptcy, or record of accounts turned over to collections agencies? 
• Outstanding debt – How many outstanding balances appear on the credit report? What is the average account balance? What is the ratio of total balances to total credit limits on revolving debt, such as credit cards or home equity lines? 
• Credit history – How long have you had your oldest account? How many inquiries and new accounts does your report show, and how recent are they? 
• Types of credit in use – How many accounts are reported for bank cards, travel and entertainment cards, department store cards, and installment loans? 
• Too little or no credit – Having too few bank revolving accounts or a brief credit history reduces your FICO score. 
• Credit utilization rate – This rate is calculated by dividing your outstanding debt by your credit limit. Having more unused credit on your credit report helps to lower that rate, and the lower this rate is, the better your score will be.

How To Improve Your Credit Score

A FICO score is determined based on the data available on the day an inquiry is made, and can vary from day to day. You can improve your score if you:

• Pay your bills consistently and on time. Late payments rank high on the list of reasons loans or credit applications are denied. 
• Check your credit report and remove any errors. This ensures that your FICO score isn’t lowered based on inaccurate information. 
• Keep your debt at a reasonable level. Your account balances should be below 75 percent of your available credit. For example, if you have a $2,000 credit limit, you should owe no more than $1,500. 
• Maintain only a reasonable amount of unused credit. Having ready access to thousands of dollars of credit increases your chances of going into debt, and lowers your credit rating. 
• Avoid too many credit inquiries. Inquiries can be interpreted as a sign that you have been actively seeking credit, and that you may overextend yourself. 
• Pay down your credit cards. Don’t keep too many open accounts, even if the balances are low. 
• Keep your old credit cards. Fifteen percent of your credit score is based on the length of your credit history, and that includes the age of your oldest account.

Where to Obtain Your Score

Don’t fall prey to credit-repair scams. Many firms use illegal practices, while others charge exorbitant fees for things you can do on your own! To obtain your credit score, you should contact all three credit agencies:

Equifax Information Services (P.O. Box 740241, Atlanta, GA 30374; 800-685-1111; www.equifax.com);

Experian (P.O. Box 2002, Allen, TX 75013; 888-397-3742;www.experian.com); and

Trans Union (P.O. Box 34012, Fullerton, CA 92834; 800-916-8800; www.transunion.com).