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August 6, 2022

This article was originally posted in October 2021.

Applying what you learn here can not only improve your financial health but can put you on the path to achieving your financial goals.

You’ve heard the term “credit score” before and you have at least a general idea of what it means. Television commercials advertising free credit reports and credit monitoring services don’t clarify what a credit score is or why it’s essential to your financial health. There is plenty to know about credit scores but when you’re just starting there are only three crucial things you need to be aware of.

Applying what you learn here can not only improve your financial health but can put you on the path to achieving your financial goals.

What Is A Credit Score?

A credit score is a numeric representation of your ability to handle credit responsibly. The overall rating is based on your credit activity over a span of years. It’s used by lenders, financial institutions and other creditors to determine if you are a good credit risk. Before extending credit, the score is reviewed to assess your likelihood of repaying the debt on time.

While FICO Scores are what consumers often refer to when they think “credit scores,” they aren’t the only scoring system available. VantageScore is another source of credit scoring created by a collaboration between ExperianEquifax, and TransUnion.

Both scoring models evaluate similar criteria but vary on how the information is gathered and calculated. Scoring totals range between 350 and 900.

A prime FICO Score that represents excellent financial health is 720 or above. This is also known as “prime credit.” However, a great score is in the eye of the lender. Excellent scores can vary by as much as 30 points (or more) from lender to lender. High credit scores have benefits that can save you money and give you access to funds at lower costs. A score of less than 500 could mean credit denial. Falling somewhere between 500 and 720 could warrant credit approval but with less than favorable terms, such as higher interest rates.

1) 90% of Lenders Use FICO Scores

A proprietary, algorithmic formula is used to generate a three digit number which reflects how you’ve managed credit. Scores help creditors determine the level of risk they are taking by entering into a contract with you. Those three numbers are not only used as the basis for approval but for interest rates and terms based on the lender's policies. Lenders rely on your FICO Score to help them quickly determine how likely you are to repay the debt obligation. FICO Scores come in different versions depending on the type of creditor requesting the score and the credit bureau being used to process the request.

2) FICO Scores Are Based on Your Credit Activity - Not Income or Employment History

If you’ve never used credit, then you will not have a FICO Score regardless of your income. You must have at least one account open for at least six months that's been reported to a credit bureau, e.g., Equifax, Experian, or TransUnion, for it to be reflected on your credit report. While income and employment history may be used by lenders to determine your ability to take on the debt, this information is not used to calculate the FICO Score. Your score uses past credit performance to determine creditworthiness. Your credit report will change if you correct errors on your credit report or if you exhibit positive or negative behaviors in the categories that make up the FICO Score.

3) Only Five Credit Activities Influence Your Credit Score

Here are the common activities that make up a credit score with the specific percentages that apply to the FICO Score.

  • Positively influence 35% of the score by making payments on time.
  • Positively influence 30% of the score by only using 10-30% of your available credit. Maxing out your credit limits lowers your score.
  • Positively influence 15% of the score by keeping credit lines open since the longer you can show good credit habits, the better.
  • Positively influence 10% of the score by limiting the number of new credit lines opened at any one time.
  • Positively influence 10% of the score by maintaining a variety of credit, e.g., retail credit cards, major credit cards, student loans, car loans, etc.

VantageScore looks at similar credit activity but varies on the weight given to each area.

Your credit score is a snapshot of your credit activity through a specified period. It is subject to change which means you can improve your score over time.  Knowing the basics about credit scores may help you consider your future credit moves more carefully. The best place to start is to request a copy of your credit report. If you have HawaiiUSA Digital Banking you have free, secure access to your credit report and credit score anytime with My Credit Score. Otherwise, you can obtain one for free at AnnualCreditReport.com

If you recently applied for credit you may be able to obtain a free copy of the credit score used in the approval process by merely asking the creditor. Otherwise, you may need to purchase your credit score from a credit bureau. The three main credit bureaus are provided here for your reference.