Credit Facts

What is a Credit Score?

A credit score is a numerical representation of someone's creditworthiness, derived from their credit history. It helps lenders assess the risk of lending money. In the United States, credit scores typically range from 300 to 850, with higher scores indicating better credit risk.

There are two types of credit scores:

FICO Score: Created by the Fair Isaac Corporation, it's the most commonly used credit scoring model for mortgage and some auto financing lenders.
Vantage Score: Developed by the three major credit bureaus; Equifax, Experian, and TransUnion, this model is also widely used by credit card companies.

300 - 579 = Poor Credit
580 - 669 = Fair Credit
670 - 739 = Good Credit
740 - 799 = Very Good Credit
800 - 850 = Excellent Credit

A good credit score is essential for financial health and can open doors to better interest rates on loans, housing options, and more. By understanding how credit scores work and actively managing yours, you can achieve better financial outcomes.

How Are Credit Scores Calculated by the Scoring Models?

35% = Payment History: How you pay your bills; if they are paid on time, have late payments, in collections, or in default etc. and factors in the largest part of your credit scores.
30% = Credit Utilization: Your balances versus their credit limits on open revolving accounts (credit cards/retail store accounts) and is the second largest portion of your credit scores.
15% = Length of Credit History: The length of your credit history from the oldest to newest accounts. The older the accounts, the better it is for your credit scores.
10% = New Accounts/Inquiries: Any new accounts or hard inquiries that you've recently acquired or obtained. Any time you apply for credit, a lender/creditor will obtain your report from the bureau(s) placing a hard inquiry onto your credit report and lowering your credit scores.
10% = Mix of Credit: Mix of credit is the various types of accounts that you have on your credit report such as revolving (credit cards/retail store accounts), mortgage, and installment loans (auto, personal, student, and recreational like ATV, RV, boats, jet ski, or golf carts etc.).

Importance of Monitoring Your Credit Reports

Monitoring your credit reports is an essential practice for maintaining good credit health and protect yourself against identity theft and fraud. Here's an overview of credit reporting monitoring including its importance, how to do it, and best practices:

Identity Theft Detection: Regular monitoring helps you spot unusual activity, such as accounts opened in your name without your knowledge, which could indicate identity theft.
Error Identification: Credit reports can contain inaccuracies. Monitoring helps you identify and dispute errors that can negatively affect your credit scores.
Credit Score Management: By keeping an eye on your credit reports, you can understand the factors affecting your scores, enabling you to take actionable steps to improve it.
Loan Readiness: If you plan to apply for a loan or mortgage, monitoring your credit report allows you to address any issues ahead of time, enhancing your application chances.
Preventing Financial Distress: Understanding your credit profile helps you manage your finances better and can prevent you from overextending yourself with debts.

Length of Time Negative Accounts Remain on Credit Reports

Late Payments: Late payments can remain on your credit report for up to 7 years from the date of the missed payment.
Charge-Offs: These can also stay on your credit report for up to 7 years from the date of the original delinquency that led to the charge-off.
Collections: Accounts sent to collections typically remain on your credit report for up to 7 years from the date of the original delinquency.
Bankruptcies: Chapter 7 bankruptcy can remain on your credit report for up to 10 years from the date it was filed. Chapter 13 bankruptcy usually stays for 7 years from the filing date.
Foreclosures: A foreclosure can stay on your credit report for up to 7 years.
Judgments: If you have a judgment against you, it can remain on your credit report for up to 7 years from the date it was filed.

* It is worth noting that while negative entries can affect your credit scores, their impact may lessen over time, especially if you manage other aspects of your credit responsibly. Additionally, some older items may drop off your report automatically, and you have the right to request that inaccurate information be either corrected or removed.

Top Ten Mistakes That Hurt Credit Scores

Missed or Late Payments - Payment history is one of the most significant factor affecting your credit score. Missing a payment or paying late can have serious negative impact to your credit scores. Even one late payment can stay on your credit report for up to 7 years.
Maxing Out Credit Cards - Using a large portion of your available credit can significantly lower your credit scores. Aim to keep your credit utilization ratio (credit card balances versus their credit limits) below 30%, and ideally, lower than 10% for optimal scoring.
Applying for Multiple Credit Accounts at Once - Each credit inquiry made when applying for a new credit account can lower your score. Applying for several accounts within a short period signals to lenders that you may be in distress, which could hurt your creditworthiness.
Closing Old Credit Accounts - Closing old or unused credit accounts can reduce your overall credit limit and increase your credit utilization ratio, negatively impacting your score. It also reduces the average length of your credit history, which is a factor in your credit score.
Not Checking Your Credit Report Regularly - Failing to review your credit report can lead to missing errors or fraudulent accounts that may hurt your score. It is essential to check your reports for inaccuracies and dispute them promptly.
Having a High Number of Hard Inquiries - While a few hard inquiries are okay, having too many within a short timeframe can lower your score because it indicates higher risk. Aim to space out credit applications to minimize the impact.
Ignoring Debt Collection Accounts - If you fail to address accounts that have gone to collections or have been charged-off, this will negatively impact your score. Even paid collections can remain on your credit report for up to 7 years, but addressing them can help improve your score over time.
Defaulting on Loans - Defaulting on loans or declaring bankruptcy severely impacts your credit score for 7 to 10 years, depending on the bankruptcy you filed, making it difficult to obtain new credit.
Using Credit Cards Solely for Essential Purchases - While using credit responsibly is essential, failing to use credit cards at all can negatively impact your score. Lenders want to see that you can manage credit, so make small purchases periodically and pay them off in full.
Not Diversifying Credit Types - Having a mix of credit types (credit cards and retail accounts or revolving accounts) and (installment loans or installment accounts) can positively influence your credit score. Relying too much on one type of credit hurt your score if those accounts are managed poorly.