Your Credit Score: Everything You Need to Know

What is a credit score?

Your credit score is a mathematical assessment of the likelihood you will repay what you borrow. It is based on the information in your credit report, which tracks your credit-related activity. Types of credit include credit cards, store cards, personal loans, car loans, mortgages, 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/taken out. Your report also shows if you have experienced any credit-related legal actions, such as a foreclosure, bankruptcy, or repossession, and who has pulled your report (called an inquiry).

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.

Scoring models

The most commonly used scoring model is 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. 

Lenders may also use a different measure, created by the three credit bureaus, called VantageScore^®, Click here for the differences between these two.

FICO has different models that can also vary, but all have a similar underlying foundation, and all versions effectively identify higher risk people from lower risk people.

FICO score

Using the most common FICO scoring model, generally, those with a higher score are more easily granted credit and get a better interest rate. A score of 700 and above is typically considered good, while 800 and above is excellent. However, most scores fall between 600—750, according to Experian.

If your score falls below 600, you will probably have a hard time getting a mortgage (many lenders require you to have at least a 620 or higher). To get the best interest rate, you usually need at least a 740.

The following are the factors that are used to calculate your FICO score. The percentages provided are estimates.

• Payment history (35%) Making your payments on time boosts your score. Conversely, if you make a late payment, your score will take a hit. The more recent, frequent, and severe the lateness, the lower your score. Collection accounts and legal actions have a serious negative impact.
• Amounts owed (30%) Carrying large balances on revolving debt, like credit cards, particularly if those balances are close to the credit limits, will lower your score.
• Length of credit history (15%) The longer you have had your accounts, the better.
• New credit (10%) This factor looks at the number and proportion of recently opened accounts and the number of inquiries. While many inquiries on your report will lower your score, all mortgage or auto loan inquiries that occur within a 45-day period are considered just one inquiry for scoring purposes. Accessing your own report is not damaging to your score nor are inquiries from pre-approval offers. Having new accounts can hurt your score, but if you have had a history of late or irregular payments, reestablishing a positive credit history will be taken into account.
• Types of credit used (10%) Having a variety of accounts, such as credit cards, retail accounts, and loans, boosts your score.

Since your Equifax, Experian, and TransUnion credit reports do not necessarily contain the same information, your FICO score from each bureau may be different. When you apply for credit, the creditor may only check one of your scores or check all three and average them or take the lowest or middle score.

Improving your score

Following these habits can boost your score:

• Always pay on time: Your payment history makes up the largest chunk of your credit score, so making your payments on time is extremely important.
• Pay down existing debt: Even if you have never missed a payment, a large debt load will lower your score. Explore ways you can lower your interest rates and free up cash to make more than the minimum payments.
• Avoid taking on additional debt: Besides paying down existing debt, make an effort to not take on more debt in the future. For revolving credit, ideally you should not charge more than you can pay off in full the next month, but at the very least, try to keep the balance well under half of the credit limit.
• Check your report for errors (and report them): Many reports contain score-lowering errors, so make sure to check your credit report from the three bureaus at least annually. You can get a free copy of your report once a year from the Annual Credit Report Request Service. Note: Equifax and Experian handle their disputes online, while TransUnion lets you submit your dispute through their website, by phone or mail.
• Keep your old accounts: A long credit history with the same accounts indicates stability.
• Avoid excess credit applications: When you apply for credit, your score decreases just a bit. If you do it frequently, a creditor may see it as a sign that you need to rely on credit to pay your obligations.
• Be patient: It may feel like credit mistakes can haunt you forever, but remember that your payment history from the past two years is much more important than what happened before that. Also keep in mind that most negative information is removed from your report after seven years.

Obtaining your score

When you apply for credit, the creditor may provide you with your score at no cost. Otherwise, if you want to see your score, you typically have to pay for it. The most widely-used is the FICO score. But there are a variety of services that sell different types of credit scores, so when you are purchasing your score, it is extremely important to pay attention to what exactly you are getting. Tower members enrolled in Digital Banking can activate ID Smart Shield to receive free VantageScore^® and TransUnion credit reports.^*

Checking your credit score can be helpful if you are planning to get a mortgage or car loan soon, and want to have an idea if you will get approved or qualify for the best interest rate. Otherwise, you may just want to stick with checking your credit report, which is available for free. Remember, your score is based on the information that is in your report.

Contact Information

Equifax
www.equifax.com
1-800-685-1111

Experian
www.experian.com
1-888-397-3742

TransUnion
www.transunion.com
1-800-888-4213

Fair Isaac Corporation
www.myfico.com
1-800-319-4433

Annual Credit Report Request Service
www.annualcreditreport.com
1-877-322-8228