Understanding Your Credit Score

While you probably realize that your credit score is an important number, you may not know exactly it means or what it says about your financial status. Read on to learn more about credit scores and find out how you can improve your score.

What is a credit score?

When you apply for any type of credit, whether it’s a credit card, a mortgage or a car loan, lenders want to calculate the risk they would take by lending money to you. They use your credit score to determine that risk.

Your credit score represents your financial history based on information gathered from companies that have given credit to you. This information includes your payment history, amounts owed, length of credit history, new credit and types of credit used. The higher your score, the lower the risk you are to lenders. Therefore, if you have a high credit score, lenders are more likely to offer you a lower interest rate, especially on home loans.

Who keeps track of my credit score?

Every consumer has three credit scores, one from each of the U.S. credit bureaus: Experian, TransUnion and Equifax. Each of these credit bureaus calculate your credit score based on a financial file they keep on you. As your financial information changes, the credit bureaus adjust your credit score accordingly.

What is considered a “good” credit score?

Typically, a credit score of 680 or higher is considered a “good” score, while 750 and higher is considered an “excellent” score.

How does my credit score affect interest rates?

Lenders typically offer lower interest rates to consumers with a better credit score. For example, someone with a score of 600 might pay an 8.9% interest rate on a 30-year fixed mortgage right now, while a consumer with a credit score of 700 would pay closer to a 6.5% interest rate.

If you are considering taking out a substantial loan, you should check your credit reports first. If there are negative items included in your report, you have two choices: pay higher interest rates for seven to ten years or dispute these items.  

What is included in my credit report?

Your credit report includes information about your financial history, such as:

• Account payment and history from credit card companies
• Car loan information
• Mortgage information
• Requests from companies to look at your credit report. (Companies can view your credit report without your consent. If you have applied for credit, the company will look at your credit report.)

Your credit report only includes information gathered from lenders and other companies—not individuals. Therefore, if you borrowed money from a friend or family member to buy a car, that data will not be included in your credit report.

How do I request a copy of my credit report?

An amendment to the federal Fair Credit Reporting Act requires each of the major credit bureaus to provide you with a free copy of your credit report once a year. To order your free annual reports, visit: www.annualcreditreport.com or call 1-877-322-8228.

How can I improve my credit score?

There are many ways you can boost your credit score. If you want to improve your credit score and gain access to lower interest rates, consider doing the following:

• Pay your bills on time each month
• Keep balances low on credit cards
• Don’t apply for more credit cards than you need
• If your credit card company increases your line of credit and you don’t need it, ask them to reduce it
• If you’re planning on applying for a home loan, don’t apply for a car loan, credit card or any other major loans until after you have purchased the home. The mortgage lender will check your credit again just before you sign the papers.
• If you’re struggling to pay bills, consolidate your debts into one monthly payment.