Saving for Change

Shining a Light on Credit Scores
by Colleen Dailey

Like your shadow, your credit score – also known as your FICO score – goes everywhere you go. Landlords use it to judge whether or not you’ll be a good tenant. Banks use it to approve or deny loan and credit card applications. Insurance companies use it to determine your insurance rates. More and more potential employers now look at it to determine whether or not you’ll be a good and reliable employee.

Given how important a credit score is to our financial lives, one would think we’d know more about this mystery number that ranges between 300 and 850. Yet, a recent survey by the Opinion Research Corporation found that nearly half of all Americans have very little idea what their credit score measures or how it’s used. Here’s some valuable information that can help you save thousands, maybe even tens or hundreds of thousands, of dollars over your lifetime.

How can you get your credit score?

You can get your credit score by ordering your credit report directly from any one of the 3 major credit bureaus: Equifax (1-800-865-1111), Experian (1-888-397-3742), or TransUnion (1-800-888-4213). The cheapest option for getting all 3 scores is to order them online at www.annualcreditreport.com or by calling 1–877–322–8228.

Note: You are entitled to one free annual copy of each credit report, but the free copy does not include your credit score. For a small additional fee (between $4.95 and $6.95), you can add your score to each report.

It’s a good idea to review your credit report from each bureau at least once a year, especially given the rise in identity theft. If you find errors on your credit report, the report will include clear instructions on how to correct information or report identity theft.

What is a good credit score?

Many lenders use 720 or 700 as the cutoff for giving borrowers their best available interest rate. About 60% of the US population has a credit score of 700 or above. Some lenders use 620 as the cutoff point for lending at any rate so those with scores below 620 will be denied loans. About 15% of the U.S. population has a score between 300 and 620. Companies that deal with borrowers in this low range are known as “subprime lenders,” because they take on higher risk and charge higher interest rates.

Here’s an example of what a good credit score can save you: A person with a score of 760 or better will pay $260 less per month for a $216,000 30-year, fixed-rate mortgage than a person with a score below 620. That’s a savings of more than $3,000 a year or $93,600 over 30 years. (Source: www.myfico.com)

What goes into a credit score?

According to Fair Isaacs Corp., the company that developed the FICO scores used by Experian, Equifax and TransUnion, there are 5 main ingredients in your score:

35% - payment history
30% - amounts you owe to creditors
15% - length of credit history
10% - types of credit you use
10% - new credit

Contrary to what many people think, your race, age, gender, and education level are not factored into a credit score.

How can you improve your credit score?

Basically by improving any of the factors listed above, starting with those at the top which carry more weight. For example, paying your bills on time and paying down old debts are two of the most common ways to improve a credit score. Paying the full balance on your credit cards each month is another way. If you can’t do that right now, then you’re buying too much on credit and need to reduce your spending.