Before hitting ‘snooze’—they dictate so much of our ability to participate in consumer life—and yet most people know so little about them. Our presenting member and mortgage lending expert Jeremy Shaffer of Premier Bank sought to change that this week—and we even wanted him to keep going after his 10 minutes were up.
First, why do credit scores matter?
As mentioned, most people generally understand that a terrible score can bar them from getting loans for large purchases—say a vehicle or house—even with a great income. But beyond the effects of ‘bad’ credit, many don’t know what constitutes ’good’ credit, how to get there, or how increases in their score can lead to lower rates, longer terms, and higher limits.
A good place to start—what is a credit score?
Beyond the self-apparent definition, Jeremy led with this question today, asking further if anyone knew what “FICO”—the preferred score at his bank—stood for. None of us knew it had been in reference to the Faire, Isaac and Company’s (now the Fair Isaac Corporation) algorithm for scoring creditworthiness, provided by the three major reporting bureaus: Experian, Equifax, and TransUnion (which we as a group were able to name).
This is the report information, in addition to score, that his team receives:
- Name & Name history or errors
- Address history
- Date of Birth & SSN
- Credit Alerts
- Inquiries the last 120 days
- Reasons for score deduction
- Trade lines – highest to lowest current credit balances, date open, original balance or limit
- Type of debt
- Past due amount
- Late payments
- Derogatory marks
- Closed accounts, good and bad, back 10+ years
Other methods of scoring do exist, but FICO remains the dominant score sought out by institutions.
With FICO’s importance in mind, what should people know about FICO scores, and how can they most use that knowledge to their benefit?
What most people should know is that FICO scores exist on a range of 300-850. On this scale—very generally-speaking (from this author, not Jeremy’s presentation)—750+ is excellent; 650+ is good; around 600 still is okay and will be strongly looked at; and scores below 550 will likely struggle accessing large amounts of capital without high rates or strict terms.
For those on the higher end of this already—congratulations! In fact, Jeremy shared that there is typically no benefit beyond 760 to having a greater score. But for those who may be hovering closer to 560—there’s more.
To close, Jeremy shared the major factors that go into FICO scores:
- 35% on-time payments
- 30% percent of utilization
- 15% credit history
- 10% Inquiries
- 10% Mix of Credit
Then he shared a few tips for how to improve them:
- Pay on time – ‘Late’ isn’t officially until 30 days past-due.
- Keep revolving balances low, pay down more often if needed.
- Increase limits to lower utilization-share.
- Call creditors to negotiate balances or derogatory marks.
- Start early when possible.
Credit Scores may seem mysterious and overwhelming at first but with the help of a professional like Jeremy, they can also be improved on and used as powerful tools.
To connect with local businesses and hear more enriching presentations like Jeremy’s, or to deliver your own, visit one of our meetings any time and consider joining to become a member!