My Credit Score
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Q. What is my credit score and how is it used?
A. Your Credit Score is a three-digit number that represents your credit rating. Fair, Isaac and Company (FICO), the credit scoring standard, provides credit bureaus (Equifax, Trans Union and Experian) with a credit score formula of 300 to 850. The bureaus then use this formula to generate your three-digit credit score. Higher scores are better. The rational is that the higher the score the less risk there is to the lender that you will not repay the loan.
How Your Credit Score Is Determined:
1. Payment History: Approximately 35% of your score.
2. Amounts Owed: About 30% of your score.
3. Length of Credit History: About 15% of your score.
4. Pattern of Credit Use: About 10% of your score.
5. Types of Credit in Use: About 10% of your score.
The Bank will use your credit score as part of all of the information it considers when making a loan decision. A low credit score in and of itself will not necessarily cause the Bank to deny your loan application.
Q. My credit score is low. How can I improve it?
A. There are many factors that are considered by the rating agencies in evaluating your credit. Probably the most important is paying your bills on time. Also very important is your debt to income ratio. This is measured by your monthly debt service payments (required payments for rent or mortgage, loans, credit cards, auto loans) divided by your monthly gross income. A score of 35% or less is within acceptable limits. If you have a higher debt to income ratio, it is important to work off as much debt as you can as quickly as possible. Other factors contributing to the credit rating are how long you have been a customer of a lender or credit card company. A well-established payment history is very important.
Here is a helpful list of ways to improve your score:
1) Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.
2) If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
3) Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
4) Keep balances low on credit cards and other "revolving credit." High outstanding debt can affect a score.
5) Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
6) Don't close unused credit cards as a short-term strategy to raise your score.
7) Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your score.
8) If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
9) Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
10) Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term.
11) Note that it's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
12) Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix - it probably won't raise your score.
13) Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score.