Question:

I hear an awful lot about this FICO score today and I am not sure I understand just what it is and how I can affect it?  What is considered a good score and can I do anything to improve it?

Answer:

In today’s world just about everywhere you turn you are hearing about credit scores, good credit, bad credit, tight credit…. so it can be confusing. Pick up the paper, turn on the radio or the television and you can be sure to find an article or a program geared to addressing the credit crisis in one form or another. All of this information coming from all different sources can be confusing if you do not understand the basics and how it affects you personally.

When you are applying for any type of credit, whether it’s a credit card, personal loan, car loan or mortgage, lenders want to know your credit risk level. In other words, if they make this loan, how likely is it that they will get paid back on time? There are three major credit reporting agencies in the United States that maintain records of your use of credit as well as other information about you. (Equifax, Experian and TransUnion)  These records are known as credit reports, but most lenders will also want to know your credit scores to include it with the other factors that go into the decision of a credit request.

The credit score is a number that reflects your credit risk and is based on a snap shot of your credit report at a particular point in time. The FICO score can range from 300 to 850 and was created by Fair Isaac Corporation which uses advance math and analytics to work with the credit reporting agencies to provide your FICO score. What is considered a good score can vary from creditor to creditor and also be effected by economic market changes. What was consider a good score this time last year is not as good today, because of the condition of the market and the risk associated with it. 

As of the day of this writing, a FICO score of 620 is considered a minimum, a score of 680 would be considered fair, a 720 score is considered good and a score of 750 and above is considered excellent. Your credit score influences the credit that’s available to you. I have heard it said “Having a higher score is like the janitor’s key ring when you went to elementary school. He had all the keys and he could go anywhere he wanted and get anything he needed”

Knowledge of how your credit risk is evaluated can enable you to take actions that may lower your credit risk and raise your credit score over time- thus giving you better financial options.

Using the FICO scoring system has shortened the approval process and taken any personal biases the lender may have out of the picture, giving you a fair and objective evaluation of your risk. The FICO score evaluates five categories of information and each one is weighted appropriately to its importance to your individual overall information. Those categories that are looked at are the types of credit in use, new credit, payment history, amount owed and length of credit history.  This explains why there are no cookie cutter answers as how to raise your score because what may be very important in evaluating your score may not be weighted as heavily in your neighbor’s.  

However there are a few things that you can be aware of that could effect just about everyone’s score. Things that could raise your score: paying your obligations on time every month and not having credit cards that are maxed out. If you have credit cards that have been open for a long period of time with small or no balances shows good management of your credit. Paying down installment loans show you can manage your credit and repay your debt. If you have missed payments, get current and stay current because re-establishing a good track record of making payments on time will raise your score over time. Pay off debt rather than move it around, pay off any collection accounts and judgments as these are considered quite serious.

Things that could lower your score: Paying your obligations late or missing payments, frequency of late or missed payments or too much of the credit card’s line is maxed out. If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. If you have several charge cards and all of the accounts have balances can indicate higher risk. Remember that closing an account which you had missed payments on will not remove it from your report or the information the score is based on.

How many recent requests for credit you have made can lower your score. When rate shopping to purchase a large item make sure it is all done within a 14 day period and it will not affect your score.

The thing to remember is if you are having trouble making ends meet, contact your creditor and see a legitimate credit counselor. It will not improve your score immediately, but the sooner you can begin to understand and manage your credit the sooner your FICO score will be raised. Legitimate credit counselors are non-profits that are HUD certified and they do not promise to get things taken off your credit report or charge fees to improve your FICO score. They work with you one on one to understand your score and teach you how to manage your use of credit in a way that will benefit you in the future. FICO scores improve in time. An excellent agency to work with is NeighborWorks Western Pennsylvania located on 5^th Avenue in downtown Pittsburgh. If you think you are in need of credit repair you can call 412-281-9773 for an appointment.

Debbie Tawney Newsom is Vice President and Senior Community Development Officer of Huntington Bank.  She has been with Huntington for 26 years and works with communities, first time home buyers, small businesses, non- profits and government agencies throughout the Pittsburgh MSA.  She also serves as the President of the Board of Directors of NeighborWorks Western Pennsylvania as well as serving on the executive committee of the Financial Education Consortium of Pittsburgh and My Money Life both promoting personal knowledge and understanding of finances to the adult and youth population of this area. You can reach her at 412-227-4828 for any further questions.