Living Well 60+ January-February 2014
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JAN/FEB 2 0 1 4<br />
Understanding Your Credit<br />
Score<br />
It’s more than just one number<br />
by Angela S. Hoover,<br />
Staff Writer<br />
A credit score is<br />
a number that<br />
summarizes your<br />
credit risk, based on your credit<br />
report at a particular point in time.<br />
Potential lenders use this score<br />
to evaluate the risk of extending<br />
credit to someone.<br />
There are three major reporting<br />
bureaus where all credit and<br />
payment histories are reported<br />
and stored: Equifax, Experian and<br />
TransUnion. All three agencies<br />
will have a different credit score<br />
based on the information of its<br />
credit report. Everyone has more<br />
than 40 different credit scores,<br />
not a single credit score as is often<br />
stated in advertisements.<br />
There are so many different credit<br />
scores because banks and other<br />
lenders use several different lenses<br />
to evaluate people’s ability to<br />
manage credit. A particular lender<br />
may use one or a combination of<br />
several credit scores to make a determination<br />
about an application.<br />
These scores come from the three<br />
bureaus and in-house models. The<br />
two most popular scores are the<br />
FICO and VantageScore.<br />
FICO, the oldest model, was established<br />
in 1956 by the Fair Isaac<br />
Corporation. Its primary business<br />
is selling proprietary scoring systems<br />
to lenders and credit bureaus<br />
to evaluate lending risk. Originally<br />
used to calculate mortgage default<br />
risk, FICO has evolved to apply<br />
to many different types of credit.<br />
Today, people have six FICO<br />
scores: generic, mortgage, auto,<br />
bankcard, installment loan and<br />
personal finance. Additionally,<br />
each of the three bureaus has their<br />
own models to change the FICO<br />
scores, each with distinct variations<br />
for the six categories. This<br />
means everyone has a minimum<br />
of 16 separate FICO credit scores.<br />
The general weighted components<br />
of a FICO score are:<br />
• 35 percent – payment history<br />
• 30 percent – amounts owed<br />
• 15 percent – length of credit<br />
history<br />
• 10 percent – types of credit in<br />
use<br />
• 10 percent – new credit<br />
The VantageScore was launched in<br />
2006 as a collaboration between<br />
the three credit bureaus to help<br />
them compete with FICO. Just as<br />
with the FICO scores, a Vantage-<br />
Score can be tailored for particular<br />
lenders and types of credit.<br />
In addition to these 20 or so<br />
FICO and VantageScores, there<br />
about 10 to 20 other direct-toconsumer,<br />
application risk and<br />
customer risk scores (also called<br />
behavior scores). Higher scores<br />
are better. This is the breakdown:<br />
• 760-850: Excellent<br />
• 700-759: Very Good<br />
• 660-699: Good<br />
• 620-659: Fair<br />
• 619 or less: Bad<br />
Each lender will have their own<br />
parameters from which to judge<br />
your credit scores. And with the<br />
flexibility to customize the FICO<br />
and VantageScore models for specific<br />
purposes, hundreds of credit<br />
scores are possible.<br />
Checking and<br />
Improving Your<br />
Credit Scores<br />
Everyone is entitled to one free<br />
credit report a year at www.annualcreditreport.com.<br />
You can<br />
also buy your report directly from<br />
each of the bureaus or all three at<br />
www.myfico.com. Widely advertised<br />
third-party companies also<br />
offer free credit reports. Read the<br />
details to see which agency and<br />
score the company is providing.<br />
For instance, if the company uses<br />
Experian, you will either receive<br />
the FICO Experian Risk Score or<br />
the VantageScore.<br />
Here are some ways<br />
to improve your<br />
credit score:<br />
• Always pay in full and on time.<br />
• Increase your credit limit if<br />
possible.<br />
• Pay off balances and don’t carry<br />
revolving debt if you can avoid<br />
it.<br />
• If you have bad or no credit,<br />
don’t apply everywhere for<br />
credit; an inquiry deducts about<br />
five points off your score. To<br />
lenders, six or more inquiries<br />
indicates a likelihood of filing<br />
bankruptcy.<br />
• Don’t close old accounts; this<br />
could lower your score, and if<br />
you had a late payment it will<br />
not disappear from your credit<br />
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report just from closing the<br />
account.<br />
• If you must close accounts,<br />
close newer ones because longestablished<br />
credit relationships<br />
score well.<br />
• Avoid opening a lot of new accounts<br />
at once, especially if you<br />
don’t have a long credit history.<br />
A good rule of thumb is to have<br />
no more than five credit cards.<br />
• Fix bad credit. Work to have<br />
inaccurate information removed.<br />
For more serious issues,<br />
such as judgments, foreclosures<br />
or bankruptcies, seek a credit<br />
repair specialist for help.<br />
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