By ANNE LAYMAN WIRES, BBA, MoM, CCUFC, Life Credit Union
You probably know your numbers and what effects them as it relates to your physical health. But do you know your numbers relative to your financial health, what they should be and what impacts them? Not surprisingly there are numerous indicators of financial wellness such as net worth, debt-to-income ratio and cash flow. One of the most important is your credit score.
Your credit score is a mathematical assessment of the likelihood you will repay what you borrow. It attempts to summarize a bower’s credit history into a single number. Your credit score is based on the information in your credit report, which tracks your credit-related activity.
There are three major credit bureaus that compile and maintain credit reports: Equifax, Experian, and TransUnion. Theoretically, all three of your reports should be the same, but it is not uncommon for creditors to report to only one or two of the bureaus. Go to annualcreditreport.com to learn more about obtaining your free credit reports.
Types of credit included in the reports are credit cards, store cards, mortgages, personal loans, car loans, student loans, and lines of credit. For each account, your report shows who it is with, your payment history, the initial amount borrowed for loans or credit limit for revolving credit, the current amount owed and when it was opened. Your report also shows if you have experienced any credit-related legal actions, such as a judgment, foreclosure, bankruptcy, or repossession, and who has pulled your report.
There are numerous scoring models utilized for varying purposes. Let’s concentrate on the most commonly used scoring model issued by the Fair Isaac Corporation. Called a FICO score, it ranges from 300 to 850, with a higher score being indicative of less risk. While there is no set standard for what constitutes a good credit score, one benchmark to keep in mind is that it is very difficult to get a mortgage if your score is below 580 (and many lenders require you to have at least a 620 or higher), and to get the best interest rate, you usually need at least a 760 though that too varies. In general, with all other factors being the same, a borrower with a high credit score will receive more favorable loan terms than a borrower with a low credit score.
As a reminder, each credit bureau uses its own formula for calculating credit scores, and the differences in the equations may lead to differences in your credit scores. While the bureaus do not disclose the exact methods or formulas they use to calculate your score, we do know the factors that they consider:
- Payment history and timely bill pay (35%)
- Amounts owed and reasonable balances (30%)
- Length of credit history (15%)
- New credit (10%)
- Types of credit used (10%)
How can you improve your credit score or maintain a high credit score? Here are a few general suggestions:
- Always pay on time.
- Pay down existing debt.
- Keep credit card balances low.
- Avoid taking on additional debt.
- Check your credit reports for errors.
- Keep your old accounts.
- Manage balance transfers well.
- Avoid excess credit applications.
- Shop for a loan in a focused period of time.
Not only do creditors typically check your score when deciding whether or not to approve your loan application and what interest rate to charge you if you are approved, but landlords, insurance companies, and even employers often check it, as well. Having a good score can help you achieve your goals quickly and at the lowest possible cost. Being attuned to this financial health number, and keeping it as high as possible, can have a major positive impact on your life.
Anne Layman Wires is vice president of member relations and business development for Life Credit Union, a financial cooperative solely dedicated to serving those who work in and for the healthcare community. Wires has more than three decades of combined experience in healthcare and banking. She can be reached at firstname.lastname@example.org. Visit LifeCU.org for more information on the full range of financial services available to you.