Credit Scores

1. Credit Scores Money Management II

2. What We’re Covering Today What is a credit score/rating? What is a FICO score? Why do I have more than one credit score/rating? Why is my credit score important? How can I improve my score?

3. What is a Credit Score/Rating? A credit score/rating is a measure of a person’s ability and willingness to make credit payments on time. Because your credit history is constantly evolving, your credit score/rating can and will change over time. It is a snapshot of the contents of your credit report at the time it is calculated. Your credit score/rating will be determined by the lender themselves or one of the major reporting credit bureaus.

4. What is a FICO Score? In 1956, a mathematician and an engineer founded a company (The Fair, Isaac Company or FICO) on the principle that data, used intelligently, can improve business decisions. In 1958 FICO built its first credit scoring system for American Investments. In 1981 FICO introduced their first credit bureau risk score. FICO Scores range between 300-850. The higher the number the less risk associated with the applicant. Today FICO scores are the driving force behind credit scores/ratings.

5. How Is My FICO Score Calculated? They’re not telling us! Considering the rating system they have developed is what keeps them in business, the Fair, Isaac Company has long refused to disclose the specifics of the algorithm used to calculate their scores. Although many factors are included in the calculation of your FICO score, they can be grouped into five major categories, each weighted differently depending upon their importance.

6. Breakdown of FICO Score Calculations

7. Different FICO Categories and What They Mean Payment History: Have you paid on time? Amount of Current Debt: What do you owe in total? How many different accounts do you owe to? Length of Credit History: How long have you been using credit? Types of Credit In Use: What kinds of credit do you currently use? What have you had experience with? Pursuit of New Credit: Are you opening many accounts? Why are there so many inquiries?

8. Why Do I Have More Than One Score? As we’ve talked about over the last several weeks, lenders set the terms and conditions of credit. This includes whether or not you are approved for credit. All three major credit bureaus use the FICO score in calculating their credit scores/rating. However, each bureau receives different information and has different models for determining their score/rating. If there is a discrepancy larger than 5-20 points between your scores, this may be an indicator of possible errors. Many lenders will use their own models to determine how risky you are, weighing the importance of factors differently based upon their lending practices.

9. Why is My Credit Score Important? • Not only will your credit score be one of the most important factors in determining whether or not you are approved for credit, it will also be a major factor in determining the terms and conditions of the loan/credit extension. • Lower Score= Higher Interest = More money! • Subprime Loans = Loans offered to less than desirable candidates. They will come with higher rates and more fees. • 620 is the magic number! • How scores affect loan amounts example • Insurance rates are affected by credit scores too! • Research has shown the lower your credit score, the more likely you are to file a claim.

10. How Can I Improve My Score? Make payments on time! Reduce overall debt Review your credit report for errors Limit your applications/inquiries Listen to the lender/bureau

11. Wrap-Up & Review A credit score/rating is ameasure of a person’s ability and willingness to make credit payments on time. Your score can change quickly! The Fair, Isaac Company generates a score ranging between 300-850 that lenders use in determining whether or not you receive credit. Credit scores have an impact on how much you will pay for the use of credit. In general, they can determine a lot about your lifestyle. There are simple ways to help improve your score!