By Andrew Lucht, Army Community Service Financial Readiness Program Manager
Soldiers and spouses often wonder why they have problems getting credit or why they are paying such high interest rates. Or they may want to buy a home someday and don’t understand how their current actions will affect their future ability to get a good interest rate. In a nutshell, it’s your FICO SCORE! Often our Soldiers do not understand what the Fair Isaac Corporation or FICO score means. Understanding the FICO scoring system is the key to maintaining a good credit rating and improving a bad one. If you know how your score is calculated you can take actions that will positively affect your score and repair your credit.
If your credit score is really high, the bank already knows you have a great history of paying your bills on time and managing your credit responsibly so you’re likely to be offered much lower interest charges as they consider you a low risk client. Similarly, if your FICO credit score is really low banks may consider you to be a high-risk client and be reluctant to lend you money. Or if they do lend you money, your interest rate may be increased to offset their risk factor. FICO Credit Score Scale and Important Score Ranges When you apply for a loan the lending organization checks your credit history AND your FICO credit score. Your FICO score is somewhere between 300 and 850. Below is a list of the ranges to help you understand how banks determine your risk levels as well as credit terms: 720 – 850 – Excellent Score. Banks will offer you the best possible terms and charges they can find. 700 – 719 – Very good Score. Creditors may consider offering you favorable credit terms. 675 – 699 – Average Score. Lenders consider you within the average range, so you’ll qualify for most loans but interest rates may not be top of the line. 620 – 675 – Sub-Prime Score. Although you will still qualify for loans, you may be charged higher interest rates 560 – 619 – High Risk Score. Banks consider you a bad credit risk and will be wary of offering you further loans unless you can verify you’ll improve on your past poor history. If you do get a loan you will have a very high interest rates. 500 – 559 – Extreme Risk Score. You need to do some serious repair work on your credit score today. Chances Now you know the ranges used by banks to determine your personal risk category, did you know the average American FICO score is 692? 5 Elements That Made Up Your FICO Score The three major Credit Reporting Agencies — TransUnion, Equifax and Experian — collect and collate information about your credit history and use it to calculate your FICO score. They then report this score to any lender making an inquiry about your history. Here are 5 elements of a credit score that made up your FICO score: 35% of your score is made up from your repayment history. If you have a history of being late paying bills or making loan repayments, you can be sure this behavior has been reported. In order to increase your score in this category, make sure all your bills are paid on or before the due date and this positive action will also be reported. 30% of your score comes from balances on your current accounts. This means making sure you pay off your credit card balances to a zero balance every month and making sure your personal loan or mortgage balances are steadily reducing against the original amount you borrowed. 15% of your score comes from the average length of time you’ve had available credit. It’s highly unfortunate that this is such a high scoring factor, as it seems to encourage people to stay in debt longer than they really need to. DO NOT confuse having credit with debt. For example, you may have credit on a VISA card but carry a zero balance. Lending institutions can also review those who have gone on a ‘credit binge’, applying for multiple credit cards and loans in recent months, which may indicate some kind of financial trouble. 10% of your score comes from the types of credit you’ve applied for. Ideally, the Credit Reporting Bureaus reward customers who have a mixture of mortgages, personal loans, credit cards and store cards. Once again, it’s unfortunate that people are rewarded so well for having too much debt, but you can improve your score by maintaining a good repayment history and good conduct on the credit you already have. 10% of your score comes from the amount of times you apply for credit. Every time you make a credit application, the inquiry is listed on your report. The more inquiries showing on your report, the lower your score, so be wary about making too many inquiries.
Unfortunately there are some unscrupulous lending marketers around making sure people believe that by raising your credit limit you may also increase your credit score as your account is no longer at its limit. Or they may say they can fix your FICO for a price. This is irresponsible marketing because it’s much safer for you — and your credit score — to simply reduce the amount you owe against your credit limits. To get your FREE FICO Score along with a free credit report contact Andrew Lucht, Army Community Service Financial Readiness Program Manager at 678-1337, to set up an appointment to help plan your financial future.