Consumer: How is my credit score determined and how does it affect me? How do I obtain mine?
Attorney General Rob McKenna: For years, creditors have been using credit scoring systems to determine if you’re a good risk for a car loan, mortgage or credit card. Your three-digit credit score is more than just a report card. A low score can cost you thousands of dollars in added interest, while consumers with very low scores – or none at all – may be denied credit.
Recent trends show more far-reaching use of credit scores and reports beyond access to credit. Employers may check credit scores when evaluating job applicants. A poor credit score can disqualify you for a government security clearance. Most insurance companies use your credit information to determine whether to offer you coverage and set premium costs; however, a state law forbids them from using your credit history to cancel or not renew an existing policy. Landlords, too, frequently review your credit before renting you a home.
Credit scoring models are complex and many companies have developed their own systems. Most models consider the following factors:
- Payment history. Making timely payments is important. If you are late, had an account referred to collections or declared bankruptcy, you will have a lower score.
- Outstanding debt. Many scoring models evaluate how much you owe compared to your credit limits. It’s not wise to max out your credit cards. Conversely, paying off your credit card balance each month will help you avoid costly interest fees but may not necessarily improve your credit score. That’s because your score merely reflects your credit report on a particular day. If your report is scored before you’ve paid your bill and you’ve used a significant portion of your available credit, the high balance will show as debt.
- Length of credit history. An insufficient credit history may affect your score. So can closing your oldest credit accounts.
- New credit applications. Applying for too many new accounts can be damaging. But according to one expert, multiple inquiries to car or mortgage lenders within a short period of time should not hurt your score.
- Types of credit. Major bank credit cards with good payment records are more beneficial to your score than a department store card. Car loans and mortgages typically have a positive effect.
Two major credit scoring models are the age-old FICO and its new competitor, the VantageScore. Both are based on selected criteria from your credit reports.
Fair Isaac, Inc., was the first company to develop a credit scoring model, known simply as FICO. Most lenders use the FICO model. FICO scores range from 300-850. Scores under 620 are considered high risk or “subprime.” The exact formula of the FICO and other scoring models is a trade secret. However, Fair Isaac has identified five criteria and their relative weight:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Types of credit used: 10%
Fair Issac’s Web site (www.myfico.com) explains how credit ratings can impact a monthly mortgage payment. One recent example showed that a person with a FICO score of 760 or better will pay $228 less per month for a $216,000 30-year, fixed-rate mortgage than a person with a score of 620.
In March 2006, the three national credit bureaus announced a new credit scoring system, VantageScore, that uses a single methodology to create scores for all three bureaus. VantageScores range from 501-990 and apply a letter grade. You earn an “A” if you score between 901-990, while a score of 600 or less receives an “F.” Scores are determined using six factors:
- Payment history: 32%
- Utilization (amount of total credit used): 23%
- Balances: 15%
- Depth of credit (length of history and mix of types): 13%
- Recent credit: 10%
- Available credit: 7%
You can purchase a credit score when you order a free credit report through the official Web site: https://www.annualcreditreport.com/. You also purchase a score directly from one of the national credit bureaus. Expect to pay about $15 per score if you buy from a bureau, compared to $6-$8 if purchasing from annualcreditreport.com.
Many other Web sites sell packages of credit products that lump scores with reports and additional services such as monitoring. Be careful when shopping online so that you don’t inadvertently pay for something you don’t want, or worse, land on a fraudulent imposter Web site.
If you are applying for a home loan, your lender is required to give you your credit score for free if the lender uses credit scores.
More information about credit scoring is available from these sites:
Federal Trade Commission: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre24.htm
Privacy Rights Clearinghouse: http://www.privacyrights.org/fs/fs6c-CreditScores.htm
Washington State Office of the Insurance Commissioner: http://www.insurance.wa.gov/consumers/credit/Credit_Scoring.asp