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Financial Literacy Cougar Money Matters

Credit Reports and FICO Scores

Your credit report is what the nationwide consumer reporting agencies use to calculate your credit score, which is used by lenders to determine your credit worthiness. The three major nationwide consumer reporting agencies are Equifax, TransUnion, and Experian.

Credit reports are used to generate a credit score. One of the most commonly used credit scoring formulas is Fair Isaac’s FICO score, which ranges from 300 (low) to 850 (high). The higher your score, the more likely you are to be approved for new credit, or offered a lower interest rate. Many factors from your credit history are used to calculate your FICO score. The nationwide consumer credit agencies don’t disclose how scores are calculated, so no one knows exactly how they are determined. The agencies may have different data on your credit history, so your score can vary between the agencies.

FICO Score

Credit reports are used to generate a credit score. One of the most commonly used credit scoring formulas is Fair Isaac’s FICO score, which ranges from 300 (low) to 850 (high). The higher your score, the more likely you are to be approved for new credit, or offered a lower interest rate. Many factors from your credit history are used to calculate your FICO score. The nationwide consumer credit agencies don’t disclose how scores are calculated, so no one knows exactly how they are determined. The agencies may have different data on your credit history, so your score can vary between the agencies.

There are several things that can affect your credit score such as:

    • Payment History: Your credit report shows your payment history (on time, late, or missed) for the past seven years.
    • Amounts Owed: Your FICO score looks at the amounts you owe on all types of accounts. For installment loans, such as student loans or auto loans, paying down your loan can help to increase your score. For revolving credit accounts, such as credit cards, your FICO score looks at the total amount you owe as well as your utilization ratio. Your utilization ratio compares the amount you owe on your card to the credit limit on the account. It is a good idea to aim to use 30% or less of your available credit.
    • Credit History Length: A longer healthy credit history can mean a higher score. For this reason, it can be beneficial to keep credit card accounts open even if you don’t use it regularly and don’t have a balance.
    • New Credit: Opening a lot of new accounts in a short period of time can lower your credit score, at least temporarily.
    • Types of Credit Used: Your FICO score considers which types of credit accounts you have experience using. It’s usually best to have both revolving (like credit cards) and installment (like student or auto loans) lines of credit, as long as you are able to manage them.

Hard Inquiries vs. Soft Inquiries

Every time a potential creditor accesses your credit report and score, it’s recorded on your report as a hard inquiry. Too many of these can show potential creditors that you are attempting to open more than one line of credit and they may choose not to loan you money.

You might also hear about soft inquiries. They occur when your credit report is reviewed when you’re not looking to open new credit lines. Unlike hard inquiries, soft inquiries aren’t considered by lenders when evaluating whether or not to loan you money. Some examples of Soft Credit Inquiries can include:

  • Landlords running credit checks when you apply to rent property
  • You accessing your own credit report for monitoring