Credit Score 101 for Credit Union Members
Most credit union members know that a credit score is an important number when it comes to qualifying for and obtaining financing like mortgages, auto loans, and personal loans. However, not everyone is familiar with what determines and affects your credit score, how lenders view your score, and ways you can improve your score if need be. It is very important to be knowledgeable about all things credit score since it is a number that has the power to impact your style and quality of life, for better or worse.
According to Investopedia, credit score is defined as a statistically derived numeric expression of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on a combination of things including your payment history, loans outstanding and a general indebtedness. These variables are evaluated by the credit bureaus (Equifax, TransUnion and Experian) to come up with a number between 300 and 850. Those consumers with a higher number closer to 850 are deemed more creditworthy whereas those with a lower number closer to 300 are deemed less so.
So, based on this definition, you may be asking exactly what financial behaviors and actions affect your credit score before applying for a loan at your local credit union. A surefire way to negatively impact your credit score is by racking up debt and consequently making late payments or no payments at all on your credit cards and other monthly bills.
Your credit score, in effect, tells your credit union how you manage money and debt. It also gives them an idea of whether or not you will ultimately repay the loan that you’re currently requesting, and do so in a timely manner.
5 Tips for Credit Score Improvement for Credit Union Members
Although most consumers have a feeling about how their current financial behavior stacks up, the best way to determine your official credit score is by obtaining your free annual credit report
. If your credit report reveals that you are in need of some credit score improvement, you can begin taking some simple steps right away to gradually send that score north.
The Federal Reserve Board offers the following 5 tips for credit score improvement.
- Get copies of your credit report, review them carefully, and make sure the information is correct.
Go to www.annualcreditreport.com, which is the only authorized online source for a free credit report that will provide links to all three credit bureaus. The Fair and Accurate Credit Transactions (FACT) Act gives consumers the ability to secure one copy of their credit report for free from each of these agencies every year.
You can also call 877-322-8228 or complete the Annual Credit Report Request Form and mail it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
- Pay your bills on time.
As we mentioned earlier, one of the worst things you can do for your credit score is to fall behind on monthly bill payments. On the upside, a the most important way to maintain a good credit score or make a bad score better is by paying bills on time, and if possible, in full. Although even paying the minimum payments on your credit cards in a timely fashion is better than paying late or skipping payments. If it will help you and you have sufficient funds in your account to do so, set up automatic bill payment with your credit union. This convenient service eliminates the possibility of being late on your payments.
- Understand how your credit score is determined.
One’s credit score is typically based on answers to a series of questions that may include:
- Do you pay your bills on time?
- What is your outstanding debt?
- How long is your credit history?
- Have you applied for new credit recently?
- How many and what types of credit accounts do you have?
To learn more about credit score models, see the Federal Trade Commission's website, Facts for Consumers.
- Learn the legal steps to take to improve your credit report.
Under the Fair Credit Reporting Act (FCRA), the credit reporting company as well as the information provider (the person, company, or organization that provides information about you to a credit reporting company) are responsible for any errors on your credit report.
In the event that you find inaccurate or incomplete information in your report, these entities should be contacted for correcting purposes. For more information as well as sample dispute letters, check out the Federal Trade Commission's “Building a Better Credit Report” which contains detailed information on your rights under the FCRA and correcting report errors.
- Beware of credit-repair scams.
Although repairing your tarnished credit may seem like a daunting task, and it is tempting to believe those TV, newspaper, and Internet ads that promise to easily and quickly repair your credit, please be advised not to fall into this trap since these are most likely scams. It is best to put in the time and effort to develop a structured repayment plan, and figure out a money management solution. And, you’re not necessarily on your own. Often, credit unions provide free, confidential financial counseling, education, and debt management programs with certified counselors to help you through this process and get you back on your feet.
By Cyndi Cohen
You can also check out the Federal Trade Commission's "Credit Repair: How to Help Yourself"
which provides info on improving creditworthiness and lists other legitimate low or no-cost resources.
Published March 27, 2012