A recent study, jointly conducted by the Consumer Federation of America and Washington Mutual Bank, revealed that although knowledge of credit scores has improved slightly among consumers, many still remain misinformed and confused. Why? Not all credit scores are created equal.
The study revealed that 31% of consumers knew that lenders use credit scores to assess risk, 21% said they thought the score represents their financial resources to repay loans, and 41% didn't know that using a credit card's entire limit lowers their score, reports SmartMoney.com. Many consumers believed marital status, residency, and education were factors in their credit score.
Your credit score--that three-digit number summarizing your credit history--is a critical factor in a lender's decision to grant you credit and at what rate. While lenders are the primary users of credit scores, some employers, landlords, and insurance companies also use them to evaluate applicants.
Therein lies the problem. If you purchase your credit score from Fair Isaac Corp. at myfico.com, you get a FICO Score. If you request a free TransUnion or Experian credit report from annualcreditreport.com and also purchase your credit score from that Web site, you'll get a VantageScore. And if you use any of these sites--experian.com, consumerinfo.com, creditexpert.com, or familysecure.com--you'll get a PLUS Score, which typically isn't used by lenders.
If you're not confused yet, try this: Different credit scores have different numbering systems. For example, a score of 800 from FICO is considered very good, while the same VantageScore would be considered a "C," or just average.
The best advice is to ask any potential lender which credit score it uses to determine your creditworthiness. Also, a clean credit history will boost all your credit scores.
Before you apply for credit, take steps to clean up your credit report:
* Pay all bills on time;
* Keep each account balance at less than 25% of your available credit limit;
* Don't close old accounts--or open a flurry of new accounts--right before you apply for credit; and
* Don't co-sign for another person with bad--or no--credit.
If you still have questions about credit scores, come talk to us at University Credit Union. We can help you sort out the facts.
Calculate Your Debt-to-Income Ratio
It's good to know how lenders determine if you'll be able to afford your monthly payments comfortably, based on your income and other debts. Remember: Many lenders exceed these guidelines, particularly if you have no debt, good credit, or a large down payment when applying for a mortgage.
Use this guide to calculate your debt-to-income ratio:
Debt:
Monthly mortgage or rent $________
Minimum monthly credit card payments ________
Monthly car loan payment ________
Other loan obligations ________
Total monthly debt payments: $________
Income:
Monthly gross salary $________
Other monthly income (bonuses, overtime, and so on) ________
Monthly alimony received ________
Total monthly income: $________
Total debt divided by total income = _______%
36% or less: This is an ideal debt load to carry for most people. Showing that you can control your spending in relation to your income is what lenders are looking for when evaluating if you are credit-worthy.
37% to 42%: Your debts still may seem manageable, but start paying them down before they begin to spiral out of control. At this level, credit cards still may be easy to obtain, but acquiring loans may be more difficult.
43% to 49%: Your debt ratio is high and financial difficulties may be looming unless you take immediate action.
50% or more: Seek professional help to make plans for drastically reducing your debt before it becomes a real problem.
Copyright 2010 Credit Union National Association Inc. Information subject to change without notice.
A Credit Score of 760 is the New 720
To get the best interest rates on mortgages and other loans, many lenders now require a credit score of 760 or higher to be in the "excellent" category. What does that mean for you? Pay all bills on time. Keep your utilization rate--the amount of credit used in relation to your total lines of credit--less than 25%. And don't open a flurry of new accounts, or close old accounts you've had a long time, right before you apply for new credit.
Your savings federally insured to at least $250,000 and backed by the full faith and credit of the United State Government. National Credit Union Administration, a U.S. Government Agency.
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