Credit Scores

​Even though this topic gets plenty of coverage, there continues to be confusion.  This is an essential read for young adults and/or if you struggle with your own credit score.

What is FICO?

FICO is the methodology behind the calculation of credit scoring.  It stands for the Fair Isaac Corporation.  Who knew? There are various models of the FICO Score; they are referred to as FICO 8, FICO 9 and FICO 10, etc.  Different lenders and credit reporting agencies use different models.  When looking at your credit score it will generally say which “model” is being used. 

FICO scores range from 300-850.  Generally, 700 or above is considered a “good” score.  Oddly enough, when paying off debt (mortgages, car loans, etc.) your credit score can decrease.  This is because the “mix” of credit available to you just got smaller.

For instance, suppose you have a mortgage, a home-equity line of credit, an auto loan and two credit cards. You received your bonus in January and decided to pay off debt (good move) and choose the mortgage and auto loan (both are installment debts).  A couple of months later you run your credit report and notice your credit score went down!  What happened?  The mix of credit changed to just revolving debt. (Credit cards and the equity line are considered revolving credit).  However, you may notice your score did not decrease drastically; most likely it went down by a few points.  The important thing to remember is to keep your score above 700.

How is Your Credit Score Calculated?
​

• Payment history accounts for 35% of your score.  Ideally you pay your debt on time, credit cards in full and on time. Some people like to pay their credit card as they charge (making payments throughout the month because they don’t want a big balance when they get their statement).  This can actually hurt your score.  Best case scenario is to pay-in-full by the due date.  Lenders want to see you manage your debt appropriately.
• Amounts owed, 30%. (Otherwise known as the utilization rate; the amount of revolving credit used divided by the amount available). The ideal ratio is 30% or less.
• Length of credit history is 15%.  How long have you been using credit?  Longer is better IF you use it responsibly.  Closing older credit card accounts can sometimes hurt your score as 1/you now have less credit available to you and 2/ your borrowing history shortened.
• New Credit is 10%. The number of credit accounts you have opened or, in other words, the number of hard inquiries vs soft inquiries (soft do not count against your score).  Unless your hard inquiries are excessive, this doesn’t have much of an impact on your score.  
• Credit mix is 10%.  What type of credit do you have? Types include installment loans, revolving loans, mortgage debt, and retail accounts.  As we discussed above, the irony is that when you pay off the mortgage, student debt or car, your score can shrink by a few points depending on how your credit mix changed!

Common Questions

1. If 700+ is good, does it make a difference in the amount of credit extended or approval process if your score is 710 vs 810? 

It can.  There are many other factors considered in addition to your credit score when you apply for credit.  A few include your debt-to-income ratio, length of credit history, length of employment history and past credit issues.  And, according to the FTC, if you are rejected a lender must provide you with its reason for rejection.  You can always call to learn more.  This is why it is so important to stay on top of your credit report, not just your credit score.

2. Do you have any “gender studies” relating to who has better credit overall, men vs women?

According to the credit bureau, Experian’s data from the first quarter of 2020, women and men now share an average FICO credit score of 705. This is a 1-point increase for women from the second quarter of 2019 and about a 10-point increase for both groups since the second quarter of 2015.

3. Does it help your credit score to be an authorized user on a credit card?  Does it establish a credit history for the authorized user?

Becoming an authorized user on someone’s credit card can help establish a credit history.  However, keep in mind it is the account owner the card company considers responsible for making the payments on time.  If the account owner is not someone who you can trust to do that, it can and will hurt your credit score.  The credit card company includes both parties when reporting the payment history.

4. What is the best way for adult children to start to build their credit history?

• Get them educated on credit.  There are many online classes that do a great job of explaining the abc’s of establishing good credit.
• Begin with a starter credit card with a smaller credit limit. Bank of America has good options.
• Make sure the debt is paid on time and in full. 
• Respect debt. 

5. I forgot to make a payment.  What can I do?
  
It isn’t uncommon to miss a payment.  The best thing to do is to call your lender or credit card company asap, humbly apologize and have them debit your checking account for a payment.  At the same time, you can ask them to waive the late fee as well as the interest charges. This is when it helps to have an established relationship with a bank/banker.