Credit scores play a crucial role in helping lenders assess your creditworthiness based on your credit report. If you’ve been responsible for repaying debt in the past, you’re likely to have a higher score. Remember, these scores are dynamic and can change as your credit report evolves.
What Is Credit?
Simply put, credit is the money you borrow with a promise to pay it back. When you take out a loan from a bank or use a credit card, you’re utilizing credit.
Your Credit Report
Think of your credit report as a detailed story of how you’ve managed debt over time. If you have a credit card, car loan, or student loan, you have a personal credit history. These reports are maintained by national consumer reporting agencies like Equifax, Experian, and TransUnion.
The FICO Score
The most common credit score is the FICO score, developed by Fair Isaac Corporation. This score ranges from 300 to 850, and a higher score indicates lower risk to lenders. Your FICO score is calculated based on five main categories:
- Payment history: 35%
- Amount owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
(Note: This information is from the Fair Isaac Corporation. FICO® is a registered trademark.)
Why Credit Scores Matter
Credit scores are essential because they determine whether you can qualify for loans and the terms you might receive, like interest rates. A higher score usually means you can access credit more easily and receive better interest rates.
Be mindful: late or missed payments can significantly impact your score. Other factors that might hurt your credit include high credit card balances, having too many accounts, closing old accounts, or exceeding your credit limit.
The Impact of Poor Credit
Having a low credit score can make life a bit more challenging. Lenders may see you as a higher risk, which could lead to:
- Higher interest rates on loans and credit cards
- Increased insurance premiums
- Limited job opportunities
- Fewer housing options
- Denial of credit applications
Building a Strong Credit Score
Don’t worry—there are plenty of ways to nurture a healthy credit score. Here are some friendly tips to help you on your journey:
- Keep your credit card balances low.
- Avoid opening new credit cards unless necessary.
- If you’ve faced credit challenges in the past, focus on rebuilding your history responsibly.
- Work on reducing your debt by making extra payments whenever possible.
- If you’re new to credit, consider saving copies of regular bills (like cell phone or rent payments) to demonstrate your payment history to future lenders.
Monitoring Your Credit
You’re entitled to a free credit report from each of the three major agencies once a year, thanks to the Fair and Accurate Credit Transactions Act. You can request these reports together or at different times throughout the year.
To get your reports, simply visit annualcreditreport.com or call (877) 322-8228. Be cautious of other companies that might charge you for similar services.
Checking Your Credit Score
Keep in mind that credit scores can vary between agencies since not all lenders report to every bureau. Each agency has its own formula, and lenders may use different criteria based on the type of credit you’re applying for.
You can check your credit score through various means:
- Many credit card companies and banks offer free score access to their customers.
- Reach out to nonprofit credit counselors in your area for assistance.
- Be wary of companies that require credit card information for a “free” score; they may charge you if you forget to cancel within a trial period.
- You can also purchase your score directly from myfico.com.
For more information on credit scores, check out the Consumer Financial Protection Bureau.
Arkansas Student Loan Authority and Credit Scores
The typical college student may not have enough credit history to have a good credit score or a credit score at all. The Arkansas Student Loan Authority understands this issue and has created a very inclusive cosigner policy. Where most lenders require a cosigner to be a parent or guardian, ASLA allows anyone to be a cosigner. ASLA also has a very inclusive minimum credit score requirement. Most lenders have a 670 or 680-score minimum requirement. ASLA has a 660-score requirement.
Disputing Credit Issues
If you notice something on your credit report that doesn’t seem right, you have the right to dispute it. You can file a dispute with the lender or the reporting agency directly. Lenders should provide information on how to file a dispute on their websites, and each agency can guide you through the process as well.
Equifax
P.O Box 105069
Atlanta, GA 30348-5069
(800) 525-6285
Experian
P.O. Box 9554
Allen, TX 75013
(888) 397-3742
TransUnion
Fraud Victim Assistance Division
P.O. Box 2000
Chester, PA 19016
(800) 680-7289
