This was originally published on Monday, January 22, 2018, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: My New Year’s personal finance resolution is to start repairing my credit score. I have had some missed payments and other serious financial troubles. I know that there are certain areas that the credit institutions look at but I find it all a bit confusing. Could you help simplify how it works and what I can do to improve my score?
Answer: That is a great resolution. Your credit is important because it affects your ability to get low interest loans, your employment, your purchasing power and many other areas. Your credit is basically your reputation as a borrower. Credit agencies use information about your borrowing patterns and repayment history.
Your credit history is the foundation on how you are scored. Paying bills on time is the key to good credit. Paying late or defaulting on payments can severely damage your score and rebounding from it can take a while. Employers, utility agencies, and landlords often look at your credit history to see how financially responsible you are.
When looking at your credit, many use credit score, credit report and credit history interchangeably. These are three separate terms that are related to each other.
Credit score. This is a calculated value that specifies your creditworthiness. FICO, or Fair Isaac Corporation, has created a formula that’s the model most financial institutions use to determine your credit score. Your credit score can range from 300 to 850. There are 28 different FICO scores that are industry specific. The three credit bureaus often use these different scores and this is the reason you get a different score from each.
According to the myfico.com website here is what your FICO scores indicate:
- 800 and up is an exceptional score and is well above the average U.S. consumers. It exhibits that you are an exceptional borrower and that you are not too far in debt and pay your bills in a timely manner.
- 740-799 is very good. It is still above the average of most United States consumers and indicates that you are a dependable borrower.
- 670-739 is good. In this category you are near or slightly above the average credit score which the FICO website states as 695. Most lenders consider this a score still trustworthy.
- 580-669 is fair. If your score falls in this range you are below the average consumer score. Lenders still see some credit worthiness in you but will offer a higher interest rate.
- 580 and below is poor. This range is far below the average consumer score and indicates to lenders that you are a very risky borrower. Many who fall in this category are often denied loans.
Credit report. This is the official record of your credit history that you receive from the three credit bureaus — Equifax, Trans Union and Experian. Lenders, utility companies, landlords and collection agencies send the credit bureaus information about your status with them.
You are entitled to a free credit report from each of the three credit reporting agencies once every 12 months. You can request all three reports at once, or space them out throughout the year, which is my recommendation. That way you can monitor your scores throughout the year. You can order your free credit reports at https://www.annualcreditreport.com.
Credit history. This is the unofficial record of your debt and repayments. Your credit history describes how you use money. It contains how many credit cards you have, how many loans do you have and if you pay your bills on time.
You have a credit history if you have a credit card or a loan from a financial institution. Without a credit history, it can be harder to get a job, an apartment, or even a credit card.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at firstname.lastname@example.org and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.