Credit score important tool in making financial decisions
January 12, 2012
FORT JACKSON, S.C. -- Credit scores allow creditors and lenders to assess a person's credit and determine his or her credit risk. The "FICO Score(s)" was established by the Fair Isaac Corp., which developed the software to weigh certain components of the credit report and generate a score.
Each of the credit reporting agencies, Experian, Trans Union and Equifax also has its own FICO Score. Experian uses the Fair Isaac Risk Model, Trans Union has Empirica(r) Credit Score model and Equifax uses the Beacon Score.
It is imperative that consumers understand how FICO scores can affect how much money in interest is paid for a product or service. The higher the credit score, the lower the risk, the lower the interest rate. The lower the credit score, the higher the risk, the higher the interest rate.
Credit scores are a direct reflection of the credit report. Payment history composes the biggest bulk, a whopping 35 percent of the credit score. Are there significant 30-day, 60-day, 90-day, 120-day late payments? Are there any accounts in collections?
Next in line is "amounts owed." What is the current balance to credit limits ratio? Ideally, the ratio should be less than 30 percent. The length of credit history counts for 15 percent. When was credit first established? "New credit" and "types of credit in use" are both 10 percent of the credit score. For new credit, how many accounts have been opened in a 12-month period?
As for the types of credit, the agencies look for diversification in this category. Are there any mortgages, installments, bank cards, revolving accounts? In general, personal finance companies are not favorably viewed.
In July 2011, a federal credit score law was established to allow consumers who had been rejected for new lines of credit based on their credit score and for those consumers who have been granted new lines of credit along with a high interest rate to receive a free credit score from the lender. In addition, the lender is required to disclose what part of the consumer's credit history is affecting risk.
Knowing your credit score will not only save you money; but gives you the ability to make financial decisions with confidence. Your credit score is a key tool to help decide whether to buy now or save and postpone the purchase.
MyFICO score is free for active duty, active duty National Guard, active duty reserve members, and their spouses. Contact the Financial Readiness Program at 751-5256 to schedule a personal financial session.