When you apply for a loan or credit card, lenders want to know what the chances are that the loan will be repaid. They assess this risk based on your credit report, which is a comprehensive view of your credit history. Lenders may also purchase your credit score from one of 3 national credit bureaus: Equifax, Experian, and TransUnion. Your score is calculated based on the information in your credit report and summarizes the risk of lending you money. Credit scores influence the amount of credit that you are given and the terms (like interest rate) that you are offered. This is why it is important to maintain your credit health, and check your credit report annually.
In order to have a credit score, your credit report must include enough recent information to calculate it. Usually, this means that you must have a minimum of one account open for six months or more that has also been reported to the credit bureau from which the score is calculated within the last six months.
Credit scores usually range from 300-850, with the higher the score representing the lowest risk. Your score does not determine whether you are a “good” or bad” borrower. There is no specific score used by all lenders; each lender has their own policies on risk levels and additional factors when it comes to approving a loan. At Lone Star Credit Union, we look at your comprehensive financial history rather than your credit score alone when processing loan applications.
Your credit score will change over time because the information in your credit report also changes over time. There are different factors such as new accounts, paid off loans, and payment history, that weigh into your credit score. Your current lender may use or report to all 3 credit bureaus, or they may only use one of them. There are also different types of scores that lenders can use like FICO, VantageScore, NextGen, or BEACON. These different types of scores use their own formulas to calculate a credit score.
Each national credit bureau has its own proprietary scoring formula, meaning there is no standard calculation for a credit score; however, some factors weigh into your score differently. It is impossible to say the exact impact any single factor has on your credit score as each factor’s weight depends on the overall information contained in your credit report. These are some general guidelines:
Payment History 35% - Your payment history gives lenders an idea of whether or not you usually make payments on time, how many days past the due date the payment is made, and how many missed payments you've had recently. The higher the percentage of on-time payments, the higher your score will be. Even one late payment can affect your score. New loans may drop your score temporarily due to little payment history; however, if you’ve had the same loans or credit cards for a long time and pay them on-time – even after payment troubles – your score will gradually increase.
Credit Utilization 30% - Your credit utilization is based on the proportion of money owed compared to how much credit you have available. Credit cards have a high impact on your credit utilization. Using a large percentage of your credit card credit limit can lower your credit score. On the other hand, keeping smaller balances and making on-time payment can actually raise it.
Length of History 15% - The longer your accounts are open and have good payment history, the more they will raise your score. It may seem like a good idea to avoid applying for credit or carrying debt, but not having any credit can actually lower your score and prevents lenders from being able to review credit history.
Total Hard Credit Inquiries 10% - Whenever your credit report is pulled by someone other than yourself – a lender, landlord, or insurer, for example – the inquiry is recorded on your credit report. If you’ve applied for or opened multiple accounts recently, it could lower your score. Credit inquiries stay on your report for 2 years.
Credit Mix 10% - Having a healthy mix of account types, including installment loans (like an auto or student loan), home loans, and credit cards may improve your score.
Derogatory Marks -Matters of public record such as bankruptcies, judgments, and collection items can significantly decrease your score also. Be aware of these, even if you can't always avoid them. These marks can remain on your record for 7-10 years after the last date of activity.
Under the Fair and Accurate Credit Transactions Act (FACT Act), consumers can request and obtain a free credit report once every 12 months from Equifax, TransUnion, and Experian (the nationwide consumer credit reporting companies). AnnualCreditReport.com offers consumers a fast and convenient way to request, view, and print their credit reports in a secure internet environment. They also provide options to request reports by telephone and by mail.
If you notice any inaccuracies or errors on your credit report, you should dispute them directly with the credit bureau your report came from. Once a credit bureau receives your dispute, they contact the creditor that reported the disputed information to them. The creditor has 30 days to verify the accuracy of the information, and if they are unable to do so the error(s) are removed from that credit bureau’s report. If the same error is on each of your 3 credit reports, you would need to file disputes with each of the credit bureaus. How to File a Dispute
We would be happy to discuss your current credit score and ways we could help improve your financial wellness. Just give us a call at 800.588.6928 or stop by any LSCU location today.