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Making Sense of Credit Scores and Reports

by David Sung

Do you know what your credit score is doing? If you’re a little hazy on the details, you’re not alone. In fact, most don’t consider monitoring their score until it’s time to make the next big purchase or apply for a school loan. By then, it’s too late to “repair” any sore spots in hopes of higher ratings and better interest rates. The first step for all consumers regarding their credit score is to understand how the system works.

According to Credit Karma’s Q1 U.S. Credit Score Climate Report, the average consumer has a credit score of 660 – 20 points below what many analysts and finance professionals consider a “good” credit score. Credit Karma goes on to say that although this is an acceptable score, the average has fallen in the last year by five points. Why? Many believe it’s due to the lasting effects of a struggling economy that is on a rebound. The good news is that credit debt has fallen 11% since December, which is a sign that people are recognizing the importance of financial responsibility. Although, skeptics think it’s just because of a weakened economy.

We like to give consumers more credit than that. But just in case you’re still unsure about what your credit score is, here’s an outline of the basics.

Your credit score is determined by the ability to pay back borrowed money from lenders. Banks and credit card companies are happy to lend money as long as they avoid risk. Lending companies will  assess your FICO credit score and base it on three numbers. Then, the three major credit rating companies (Experian, Equifax and TransUnion) will create your score from reports that use different metrics to determine credit worthiness. To be less confusing, each person has 3 credit reports and at least 3 credit scores. When you apply for a loan, lenders can choose which report and score to base their decision on or the lender may choose to pull all three scores and use the middle figure.

Credit Reporting Agency
FICO Score
Experian/Fair Isaac Risk Model

Because the rating companies base their reports and scores on different information, consumers will see a variance. The goal is to minimize your lowest to highest score with financial best practices, which we’ll cover in another post. While you work on changing your financial habits, know that your credit score won’t change overnight. It will take time. Another thing to note is that you can’t choose which score or report an organization can see – all the more reason to cover your bases.

Reports take into account several factors including:
  • Payment History
  • Amount Owed
  • Length of Credit History
  • New Credit
  • Credit Variation
Each of those sections has its own list of questions that it uses to rate an individual and weigh their FICO scores.  Scores are then compared in a scale ranging from 300-850.
Credit Score
620 - 679
560 - 619
below 559

You may notice slight variations in the scoring model, but this is a standard range. Not to make it even more complicated, but there is some talk of replacing the three number scores with letter grades. Some welcome this change because it’s easier to know where you stand – especially for borderline scores who may be excellent on one scale but just good on another.

There are several free and paid services, like Credit Karma, you can use to check your credit situation, but we advise that you research them fully before submitting sensitive information or payment for their services. Many of them only produce partial results. For more information on managing your credit, read this blog post about five little known credit card facts.

“Cash Store and Cottonwood Financial Administrative Services LLC are not affiliated with any of the sites mentioned in the blog post.”

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