SECRETS OF CREDIT SCORES AND BORROWING MONEY
Credit scores are the numerical gauge of a person’s financial trustworthiness. This number directly impacts a consumer’s access to credit or borrowed money and how much that borrowed money will cost.
What is a Credit Score?
A credit score is a three digit number which predicts the likelihood that a person will pay their bills on time.
How many credit scores do I have?
There are at least 3 credit scores; one generated by each of the credit reporting bureaus (Experian, Equifax and TransUnion). More scores may exist depending on whether a lender has developed their own credit scoring formula and sometimes different formulas may be used depending on the type of loan you are applying for (auto loan, credit card or mortgage).
Where does my Credit Score come from?
Your credit score is generated from information found on your credit report. Lenders and creditors report your account status and payment information to the credit reporting bureaus who store your credit information, very much like a library stores books. When a new lender offers you credit, the information from your credit report is processed through a mathematical equation, called an algorithm, to generate a score for that lender. The lender will receive that score as well as a "lender version” of your credit report which is use in the process of determining how much credit will be offered and at what interest rate.
What’s in a Credit Score?
The most common formula shared with the public is broken down as: repayment history (35%), how much is owed on your current debts (30%); length of time using credit (15%), types of credit used (10%), and new credit (10%).
What is Annual Percentage Rate (APR)?
It is the cost of borrowing money (known as "interest rate") and it is calculated on the amount of money borrowed (known as "principal”). Consumers with good credit scores will pay lower APRs than consumers with poor or no credit scores.
What are the benefits of a low APR?
A lower APR will cost the consumer less over the period of the loan than a higher APR because those consumers can pay less for borrowing money as well as pay off debt faster. Example: a great APR on a credit card might be 9.9% while a poor credit score might result in a 21.9% APR.
Raising Your Credit Score:
The best way to improve your score is to always pay on-time and pay down debt! Making on-time payments and reducing the amount of debt you have will improve your score in just six to twelve months. Having a hard time getting approved for a credit card? Consider opening a secured credit card which will allow you to build up your credit history and see your credit score rise.
Would you like more information?
Neighbors offers financial workshops on a variety of topics from money management to building credit. Call (225) 819-5748 for more information. Follow us on Twitter (@NeighborsFCU) and Facebook (www.facebook.com/NeighborsFCU) for updates on financial literacy topics and other credit union activities.
Ann Marie Erie
Neighbors FCU Community Outreach Coordinator