Understand Your Credit

There is no secret how lenders determine if you will get a loan:
They check your credit score.

It is a good bet you don’t know your credit score, the number lenders use to determine loan eligibility and your interest rates. Don’t worry. You’re not alone. Two-thirds of Americans aren’t aware of their credit score either.

While most don’t, they should, since a consumer credit score touches nearly every aspect of your finances. It is possible for you to get a yearly free look at the report credit agencies send to lenders.

Lenders and landlords use your credit score to determine if you are creditworthy. The score also determines most automotive and home insurance rates available to you. Your credit score may even prevent you from being hired.

According to the Society for Human Resource Management, approximately 20 percent of employers say they always do a credit check on potential employees as an indicator of character and job performance. Another 24 percent say they occasionally look at it when hiring.

What is Your Credit Score?

Your consumer credit report is a three-digit number, ranging from 300 to 850. The higher your score, the better credit risk lenders think you are. Normally this translates into lower interest rates.

For example: The difference between 6.31 percent and 7.89 percent interest on a 30-year $216,000 mortgage translates into nearly $83,000 savings over the life of the loan.

When it comes to Mortgages:
Higher Credit Score = Big, Big Savings

In this example, someone with a FICO score of 760 receives a 6.31 percent interest rate, while a score below 640 receive a higher rate of 7.89 percent. With a $216,000 30-year mortgage, that means a difference of $231 per month, $2,772 a year and $83,160 over the life of the loan.
FICO Score Interest Rate Monthly Payments Payment Total Over the Life of the Loan
760-850 6.31% $1,369 $481,680
700-759 6.53% $1,388 $492,840
680-699 6.70% $1,394 $501,840
660-679 6.92% $1,425 $513,000
640-659 7.35% $1,488 $535,680
620-639 7.89% $1,569 $564,840
With Auto Loans: One percent makes a difference. On a $20,000 auto loan financed over 48 months, check out the savings one percentage point give you.
Interest Rate Monthly Payment Term What You’d Pay
6% $469.70 48 months $22,545.60
7% $478.92 48 months $22,988.16

So what qualifies as a good credit score?

“Half of all Americans have a score above 720,” said Craig Watts of the Fair Isaac Corp. (FICO). FICO scores are a primary source most lenders rely on to determine an applicant’s credit.

“Generally speaking, such scores mean those consumers have never missed a bill payment,” he added.

The scores are not everlasting, and are recalculated every time a lender makes a credit request.

“If your creditors report a delinquency in excess of 30 days to one of the three credit bureaus, like Equifax, Experian, or Trans Union,” Mr. Watts said, “a person’s credit score could plummet more than 50 points, possibly sinking your score into the checkered 600 category.”

FICO scores are the most widely used among the three credit bureaus in how they assess their information, but each evaluates the information with varying results.

How Your Score is Determined

Credit Score BreakdownCredit scoring involves more than recording which bills are paid on time. It is about the length and quality of your credit history. In fact, never using credit can hurt your score because you have no accumulated history to evaluate. Credit reports accumulate a picture of your financial responsibility over the previous 24 months and predict your money-management behavior in the future. The image below shows the percentages of the categories of what makes up your credit score.A credit score is like a reputation. It takes time to develop a good credit reputation through lots of responsible credit use. Unfortunately, it takes only one or two mistakes to see that reputation rapidly disappear.

Time is on Your Side

It is possible to repair your credit and increase your score, but it won’t happen overnight.

“A score in the 600 range can be pulled up in several months,” said Nick Jacobs of the National Federation of Credit Counseling. “Pay your bills on time, keep your debts below your credit limit, and pay at least the minimum due amount each month.”

Increasing credit ratings can be a slow process. Also, there are factors that can hinder progress such as, bankruptcy, bills more than 90 days delinquent, and no previous credit history. (Click HERE for a strategy to raise your credit score.)

Monitoring for Mistakes

Poor credit ratings may not be your fault. One out every four credit reports contains a serious error that unfairly lowers your score, according to the Public Interest Research Group. Mistakes might prevent you from getting a loan, or one with the best terms, and you might not even be aware of it.

You should check your report for:

• Outdated information

• Paid-off loans still listed as “due”

• Debts by someone with a similar name

It can easily take six months or more to fix an error. Check your report months ahead of any major credit application and review your current score’s accuracy. Consider using a credit monitoring service; if, for example, you plan to apply for a mortgage.

Remember that your score is just a snapshot. It won’t be the exact figure a lender obtains when they request a credit score rating at a later date.

“Don’t get hung up on a particular number,” advises Gerri Detweiler, author of “The Ultimate Credit Handbook.” “The ballpark score will tell you where you stand. Afterwards, you can focus on improving or maintaining it.”

How To Get Your Report and Score

Under the Fair and Accurate Credit Transactions Act, every American is entitled to one free credit report annually from each of the three credit bureaus. Request your credit report from one agency and then check another’s report a few months later to monitor changes.

Go to www.annualcreditreport.com or call (877) 322-8228.

If you don’t use annualcreditreport.com, make sure your are getting your credit report for FREE. Read more…

NOTE: Actual credit scores do not come with the free report. They must be purchased through each credit bureau or from myFICO.com. Scores vary based on different information collected about you. Obtain your scores when ordering your free credit report, or contact the bureaus directly:

www.equifax.com www.transunion.com www.experian.com
(800) 685-1111 (800) 888-4213 (888) 397-3742

Courtesy of USAA®

USAA (www.usaa.com) is a diversified insurance and financial services organization that has served the military community since 1922. USAA means United Services Automobile Association and its affiliates.