FOR RELEASE: MARCH 2004
CREDIT SCORES ARE CONFUSING
STILLWATER---Credit
reports, credit reporting agencies and credit scores can be
confusing to consumers. Credit reports represent a history of an
individual’s accounts and payment history on those accounts. Lenders
of credit, such as banks, department stores, and mortgage companies
report those payment histories to the credit reporting agency. The
agency compiles those into a consumer’s credit report.
What is a credit score? A credit score
is calculated mathematically based upon information found in the
credit report. The most commonly used score, the FICO score, is
produced by using software developed by Fair Isaac and Company. A
FICO score is a way for lenders to determine the amount of risk
involved in lending. Scores range from 350 to 950 and in general the
lower the score, the higher the risk and the higher the risk the
higher the interest rate charged for extending credit.
How is the credit score determined? A
credit score is calculated from data in a credit report. Account
payment history accounts for about 35 percent of the score, amounts
owed 30 percent, and length of credit history 15 percent while new
credit and types of credit used each account for 10 percent.
How can scores be improved? Improving a
credit score can take time just like it takes time to improve the
money management habits that may have caused problems in the first
place.
Improving payment history seems to be an
obvious place to start. Paying bills on time and saying current will
raise scores eventually. Most information reflected on a credit
report will remain for seven years but paying on an account looks
better than no payment.
For amounts owed try to keep balances on
credit cards low. Avoid moving debt from one card to another card
through balance transfers. For length of credit issues do not open
new accounts too quickly.
You may have heard that scores can be
improved by closing accounts or that checking your report or FICO
score would make it worse. This is not true. Another bit of
misinformation is that credit counseling will hurt your score more
than bankruptcy. For the last 3 years credit counseling references
in your credit file have been ignored in respect to determining
credit scores. Consumers should be aware that lenders consider more
than your score when making a decision and some may view credit
counseling adversely. It is important to ask potential lenders what
they consider when extending credit.
The best way to improve a credit score
is to know what it is to start with. Consumers can obtain their
scores and credit reports from one or all of the major credit
reporting agencies: www.experian.com; www.equifax.com and
www.transunion.com.
Prepared by:
Sissy R. Osteen, Ph.D.
Resource Management Specialist
Oklahoma Cooperative Extension
Service
104 HES
Stillwater OK 74078
405-744-6282
osteen@okstate.edu |
