Understanding Loans: What to Know About Credit Scores

Credit scores are a quick way for lenders to determine your credit risk based on the information in your credit reports. Generally, if you have a good credit history, you'll have a higher credit score. Credit scores change constantly as the information in an individual credit report changes.

Credit is money you borrow that you promise to repay. You're granted credit when borrowing money from a lender such as a bank or credit card company.

A credit report is a record of how you've managed credit in the past. You have a personal credit history if you have a credit card, car loan, student loan or other type of consumer credit. Credit reports are maintained by national consumer reporting agencies, including Equifax, Experian and TransUnion.

FICO

Credit scores are calculated by a complex mathematical model that evaluates the information in your credit report. The most widely used credit score is the FICO score — which was created by Fair Isaac Corporation — that can range from 300 to 850. The higher the FICO score, the better, because you will appear less risky to lenders and creditors.

FICO scores are calculated based on ratings in five general categories, weighted for the general population*:

• Payment history: 35%
• Amount owed: 30%
• Length of credit history: 15%
• New credit: 10%
• Credit mix: 10%

* This information was obtained from the Fair Isaac Corporation. FICO^® is a registered trademark of Fair Isaac Corporation.

Importance of Credit Scores

Credit scores are important because they determine if you can qualify for credit and the type of credit you may receive, such as private student loan funds. A higher credit score usually means you can qualify for credit more easily and receive better terms, such as lower interest rates.

Making late payments or skipping payments can have a big impact on your overall score, so be sure to pay your bills on time. Other things that can negatively impact your credit score include:

• High credit card balances or high credit limits.
• Having many accounts.
• Closing established accounts.
• Bankruptcies or accounts in collections.
• Exceeding your credit limit.

Impact of Poor Credit

A bad credit history or poor credit score makes you a higher risk in the eyes of lenders and insurance companies, and even employers and landlords. With bad credit, you may:

• Pay higher interest rates on loans and credit cards. Higher interest rates mean you end up paying more money in the long run.
• Pay higher rates for auto, homeowner's and renter's insurance.
• Lose job opportunities.
• Lose housing options.
• Be denied an opportunity for credit completely.

How to Build a Good Credit Score

Your payment history is only one of the factors that are used to calculate your FICO score. Here are some tips to build and maintain a good score.

• Keep low balances and credit limits on credit cards.
• Don't open new credit cards that you don't need.
• Reestablish your credit history responsibly if you've had problems in the past.
• Reduce your debt level by making extra payments on loans or paying more than the minimum due on credit cards.

If you don't have traditional credit, you can build a credit history by saving copies of bills — such as cell phone, insurance, utilities or rent — that you pay regularly to show to potential lenders or creditors in the future.

Monitor Your Credit

You are allowed to receive your credit report at no charge from each of the three major national consumer reporting agencies every 12 months by the Fair and Accurate Credit Transactions Act (FACT Act). You may order all three reports at the same time or at different times during a 12-month period.

Request your reports online at www.annualcreditreport.com or by calling (877) 322-8228. This website and phone number are the only authorized sources for you to obtain a free annual credit report from each of the credit reporting agencies. Other companies may offer a similar service but may charge unnecessary fees.

Credit reports do not include credit scores.

Check Your Credit Score

Each consumer reporting agency calculates credit scores using the information in your credit report. Because not all lenders and other businesses that collect payments from you report that information to all the agencies, your credit scores may vary between the different agencies. In addition, each lender may use different formulas based on the type of loan or credit they offer. For example, ISL Education Lending uses a score based on one of TransUnion's formulas.

You can check your credit scores using different methods.

• Many major credit card companies and financial institutions now offer credit score information to their customers at no cost.
• You can also reach out to nonprofit credit counselors in your city for assistance in obtaining a credit score at no cost to you.
• Some companies offer you a free credit score only after you provide a credit or debit card number. Be cautious of these companies, as many times they offer this information as part of a free trial period and will then charge you a monthly subscription fee if you don't cancel before a certain date.
• You may also purchase your credit score directly from www.myfico.com.

For more information on obtaining your credit score, visit the Consumer Financial Protection Bureau.

Disputing Credit Issues

If you believe information on your credit report is inaccurate, you are entitled to file a dispute. You can file a dispute directly with the lender or the consumer reporting agencies. Lenders are required to provide information on how you may file a dispute with them on their website. To file a dispute directly with the consumer reporting agency, contact the agency.

Equifax
P.O Box 105069
Atlanta, GA 30348-5069
(800) 525-6285

Experian
P.O. Box 9554
Allen, TX 75013
(888) 397-3742

TransUnion
Fraud Victim Assistance Division
P.O. Box 2000
Chester, PA 19016
(800) 680-7289