Taking the mystery out of credit scores
Published 11:12 pm Thursday, August 22, 2013
Americans love a good mystery, and countless TV shows, movies and books capitalize on this interest. Popular crime series writers and producers have learned how to gain the attention of a mystery-loving society.
While I love a good fictional mystery, I have also always been fascinated with real-life mysteries. Is Bigfoot real? Is the Loch Ness Monster a real creature or simply a money-making tourist icon? What was that mysterious light in the sky and what really happened to the Lost Colony of Roanoke?
Perhaps the greatest mystery for many individuals is how their credit score is calculated. This three-digit number wields great power over one’s finances, but for many the details behind that number remain shrouded in mystery.
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Understanding your credit score begins by realizing there is more than just one score. Credit scores vary within the three major credit bureaus — Equifax, TransUnion and Experian. Each credit bureau may also use several different scoring models based on types of credit, such as unsecured or secured.
Next, we should remove the false ideas regarding credit scores. Your current employer, employment history and income do not influence your credit score. Age, gender, marital status and place of residence also play no part in your score. Sadly there are no bonus points for living in the great state of Virginia.
So what exactly does generate that mysterious number? A FICO score, one of the most commonly used credit-scoring systems, includes numerous categories, with payment history making up 35 percent of the score.
Amounts owed make up 30 percent of the score, but that does not mean having a lot of debt will necessarily lower your score. What can lower your score is maintaining a balance near your credit limit.
For example, having a credit card with a $15,000 limit will not bring down your score, but having a balance near that limit will start to affect your score. This is the same with lower-limit cards. If your limit is $500 and your balance on that card is $450, your score may be negatively affected.
The score is rounded out by length-of-credit history bearing 15 percent of the weight, while the final 20 percent is divided between the types of credit used and new credit.
Since so many factors play roles in determining your credit score, it can be difficult to say precisely how one change in your credit report will affect your number. However, since the greatest percentage of your score is based on payment history, the best way to help your score is by simply paying your loans on time, over time, all the time.
Finally, we must understand the benefit of a credit scoring system. Credit scores can allow lending institutions to quickly and fairly evaluate a credit report, while allowing for a more mainstreamed and consistent evaluation of creditworthiness.
Don’t be afraid of your credit score. Removing the mystery around the number is a great step in learning and improving it.
Nathan Rice is the Relationship Manager of the Downtown Suffolk branch of ABNB Federal Credit Union. He is a Hampton Roads native and can be reached at firstname.lastname@example.org.