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Table of Contents

credit score report

What Is A Credit Score?

Credit scores have a vast impact on people's financial lives. Your credit score plays a factor in the type of car or house you can afford and how much your payments will be. It can even affect your ability to rent an apartment or to be hired for certain jobs. With this much at stake, understanding how credit scores work is very important. This credit score guide will help you learn everything you need to know to understand credit scores and take control of your financial future.

First Alliance Credit Union Understanding Credit

Credit Report vs Credit Score

When you apply for a vehicle loan, mortgage, or other type of financing, the lender will review your credit report before making a decision to borrow you the funds you're looking for. Based on the information on your credit report you will be given what's known as a credit score.  

What Is a Credit Report?

Your credit report is a complete record of your debt accounts and how well you've managed them, including whether you've consistently paid on time every month. 

Your credit report includes your personal information such as your name and birthday, your current and previous addresses, and your current or last known employer. This information doesn't necessarily impact any loan approvals, but creditors will use it to help confirm your identity.

Credit reports also list out all of your revolving credit accounts, like credit cards, and installment loans, such as personal loans, auto loans, or mortgage. In some cases your medical bills and utility bills can appear on your credit report if they are in collections. Public record entries like a foreclosure or repossession will also appear on your credit report. They also include a list of any hard inquiries into your credit history within the last two years. 

What is a hard credit inquiry?

When a lender looks at your credit score they are completing what is known as a hard credit inquiry. A hard credit inquiry allows the lender to look at your activity to date and requires your permission to pull this information. A hard credit inquiry will leave a mark on your credit report, but the effect is generally negligible, however too many in a short period of time can negatively affect your credit score more significantly.

A hard inquiry looks much closer at your various trade lines and past performance than a soft credit inquiry will, meaning that your credit score will not always the same even if pulled from the same credit bureau. A lender will only complete a hard credit inquiry when you are applying for a new trade line, such as an auto loan, mortgage, credit card, etc. 

What is a soft credit inquiry?

A soft credit inquiry or "pull" of your credit looks at your past performance, it is not necessarily indicative of what you did today. It can be up to about 30 days behind depending upon the credit bureau providing the credit score. Soft credit pulls do not “ding” your credit score like it does when a lender pulls your credit through a hard inquiry.

Your permission is not required to access your credit information via a soft credit pull. When you check your credit score using a free credit score tool they are using a soft credit inquiry to review your credit report. Soft credit pulls are also typically used by companies to send you pre-approval offers in the mail. 

So, How Does Your Credit Score Fit Into This?

It can be difficult and time-consuming for a lender to analyze your entire credit report to make a decision about you. Your credit score is essentially a cumulative "grade" of the details on your credit report. So your credit score becomes a quick indicator of your risk level, or the likelihood that you'll default on a debt obligation.  

A good credit score means that you will most likely be offered a lower interest rate on a loan.  A bad credit score will most likely mean you’ll end up paying a higher interest rate on your loan. Or if it is a really poor credit score you may need to work on improving your credit score before you can be approved for financing. 

How Do I Know if My Credit Score is Good or Bad?

Credit scores typically range from 300 – 850.  The higher your credit score the better. Your credit score indicates how you’ve managed your debts overtime, it's a numerical reflection for your financial life. The chart below will give you a more detailed look at each of the credit score ranges.  

what is a good credit score

Let's take a closer look at each of these credit score ranges and what exactly they indicate to your lender: 
  • Scores under 550: This is far below the average score of U.S. consumers and demonstrates to lenders that you may be a risky borrower. Getting approved for a loan may take a little longer than those with higher credit scores.
  • Scores between 550 – 649: Still below the average score of U.S. consumers but many lenders will still approve a loan with this score. You may have higher interest rates or require a co-signer.
  • Scores between 650 – 699: This is average range of scores of U.S. consumers and most lenders consider this a good score. However, if you are at the lower end of this range you may still have slightly higher interest rates or require a co-signer on loans. 
  • Scores between 700 – 750: Above the average score of U.S. consumers and demonstrates to lenders that you are a dependable borrower. It is likely that there will be no issue for you to obtain a reasonable interest rate on a loan. 
  • Scores above 750: Well above the average score of U.S. consumers. You should not have any problem obtaining a loan with this credit score. You are considered a highly dependable, low risk borrower.

How Is A Credit Score Determined? 

Your credit score is determined based on five key factors from your credit report: your payment history, amounts owed, length of credit history, new credit, and types of credit. The chart below shows the weight of each category on your credit score as a percentage. You'll see payment history is the largest factor considered at 35%.

What Makes Up A Credit Score | Factors of a Credit Score | First Alliance Credit Union

Let's take a closer look at each of these major factors:

  • Payment History: This is the largest factor in determining your credit score. This reflects your track record of repaying debts and even includes information from public records, such as bankruptcies, foreclosures and liens, which will all negatively affect your score. If you are consistently late on your loan payments, even if only a few days late here and there, your credit score will suffer.  Pro Tip: Pay all of your payments on time every month to improve in this category.
  • Amounts Owed: This is also often referred to as your credit utilization. This category is a measure of the amount you owe on existing credit, compared with your borrowing limits. For example, if you owe $1,500 on credit cards, but you have $10,000 in available credit card limits your utilization will be lower than if you owed the same amount but only had $3,000 in available limits. Pro Tip:  To help improve this category, keep your balances low and don’t max out your credit cards. 
  • Length of Credit History: Generally, the older your credit accounts, the better your score is likely to be. But that doesn't mean people who haven’t had a credit history for very long can't still have higher credit scores, the minimum amount of credit history you need is only six months. If you're strong in the other categories this factor will not significantly impact your score.  Pro Tip: To improve in this category, don't close credit accounts if you don't have to, the older your accounts the better your credit score.
  • Types of Credit in Use: This credit category takes into account the variety of credit accounts you have, including credit cards, installment loans, and mortgage loans. Your credit score can increase if you have a good payment history with a combination of credit cards and installment loans. However, too many of one type of credit account could negatively impact your credit score. Pro Tip: Make sure to have a variety of different types of credit accounts to increase your score in this category.
  • New Credit: This category takes into account how many of your credit accounts were just recently opened, and how many credit hard inquiries have been made in a short period of time. This is important to lenders because research shows that when people open several accounts in rapid succession, they’re at greater risk of defaulting on their payments. Pro Tip: To improve in this category only open new credit when you actually need it and avoid applying for credit accounts with too many financial institutions at once. 

How To Check Your Credit Score 

Many people think if you check your credit reports from the three major credit bureaus, you’ll see credit scores as well. But that’s not the case: credit reports from the three major credit bureaus do not usually contain credit scores. 

So how do you check your credit score? Here are a few ways:

  •  Check your credit card, financial institution, or loan statement: Many companies have started providing credit scores on the monthly financial statements for free. 
  •  Purchase credit scores directly from one of the three major credit bureaus or other trusted provider, like FICO, this can cost up to $20. 
  •  Use a credit score service or free credit scoring site. Some sites like Credit Karma, Discover, or even your local credit union provide a free credit score to users. Others may provide credit scores to credit monitoring customers paying a monthly subscription fee.

In addition to checking your credit scores, it’s a good idea to regularly check your credit reports to ensure that the information is accurate and complete.

You can receive a free copy of your credit report from each of the three major credit bureaus at least once every 12 months by visiting www.annualcreditreport.com

It’s smart to request a credit report from each of the three credit reporting agencies and to review them carefully, as each one may contain inconsistent information or inaccuracies. If you find information you believe is inaccurate or incomplete, contact the lender or creditor. You can also file a dispute with the credit bureau that provided the report. We will cover more details about this process later. 

Why Do Credit Scores Matter So Much?

There is a ton of information about credit scores out there, from online articles to ads that promote various credit score monitoring applications. Who can forget the iconic "F-R-E-E that spells free creditreport.com, baby" jingle?

However, with all of this information circulating and all of these resources, there is a lack of information on how exactly your credit score actually impacts you. 

credit scores | what makes up a credit score | first alliance credit union mn

The Relationship Between Interest Rates and Your Credit Score

Below, we illustrate just how much your credit score can impact not only your loan rate, but the amount of your payment and the total interest paid over the life of the loan. The example below shows the impact of a credit score on a $20,000 auto loan with a 60 month (5 year) term. 

how do credit scores impact loans

The interest rates in the chart don't reflect any specific financial institution but they do reflect the "Risk Based Pricing" model used by the majority of financial institutions to set interest rates on their loan products. 

The logic behind this model is that the higher the score, the less risky the loan and the lower the credit score, the riskier the loan is to the financial institution. So, when there is more potential for risk, institutions will typically set a higher interest rate to compensate for the potential loss in case the borrower not repay the loan in full.  

Want to know more about the importance of credit scores? Check out this video from KIMT News 3, featuring our Lending Advisor, Kim Ferraro.

What is  A Good Credit Score for a Loan?

If you’re in the market to make a large purchase, you'll most likely need a loan. Knowing what kind of shape your credit score is in can give you an idea of if you’ll qualify for a loan and how high your interest rate will be. In this section we discuss credit score requirements for buying a house or a car, as well as debt consolidation loans.

Credit Scores for Buying a House:

Generally, you need a fairly healthy credit score to obtain a mortgage loan at an affordable interest rate. However, each mortgage program will have its own credit score requirements and they do change over time. Additionally, there are other factors that are taken into consideration when qualifying for a home loan but your credit score is a key component. The chart below compares the most common mortgage loan programs and the minimum required credit scores for each.

mortgage program credit scores | credit score for buying a home | mortgages and credit scores | first alliance credit union mn

It is important to note that each lender may have different credit score requirements, than those listed above for the same programs. Each of these programs also has additional requirements for qualification as well. So, even if your credit score is excellent, it will be important to speak with a qualified mortgage lender about the best loan option for your financial situation. If your credit score is too low, there are steps you can take to increase it, which we discuss in detail the following sections.

Credit Scores for Buying a Car:

According to a recent Experian report, at the end of 2017 the average credit score for a used car loan was 656, and 713 for a new-car loan. That being said, when it comes to buying a car your credit score mostly affects the interest rate you will pay. Each lending institution will have its own lending guidelines that dictate what the interest you will pay is based on your credit score.

If your score is really low, it’s possible you could be declined. However, there are a few options for those with low credit score to qualify for an auto loan:

  • Adding a co-signer
  • Providing a larger down payment
  • Purchasing a less expensive vehicle

It’s important to note that just because one financial institution turns you down, doesn’t mean all of them will. If you have a lower credit score seek out the financial institutions in your area that have more flexible lending guidelines, like credit unions.  

Credit Score for a Debt Consolidation Loan:

Your credit score is an indicator of the interest rate you will pay on your loan. Since one of the key purposes of a debt consolidation loan is to lower your monthly payments, you want to have a higher credit score to avoid paying a higher interest rate, which will increase your monthly payments. However, you can have a lower credit score, less than 650, and still qualify for debt consolidation loans in many cases. Below is an example to help you visualize the effects of your credit score on a $10,000 debt consolidation loan with a 36 month term.

Interest rate and credit scores

As you can see in the chart above, a lower credit score can mean you pay additional $50 a month from interest alone, that's an extra $1,800 over the life of the loan. Each lender will have different guidelines for determining what interest rate they will apply to your debt consolidation loan. If you are considering debt consolidation it is also important to understand the effects it will have one your credit score. In many cases a debt consolidation loan can improve your credit score.

Debt Consolidation Loan Calculator | First Alliance Credit Union Rochester MN

Why Are My Credit Scores Different?

There are a number of different credit score monitoring apps and websites these days. If you use more than one of these services, you may have noticed that your credit score varies each time you check your score. To make it even more confusing, your credit score is likely different when you apply for a loan at your financial institution. But why are your credit scores different?

Different Credit Scoring Models

There are three national credit bureaus, Equifax, Experian and TransUnion. While most of the information they collect is similar, there are differences. One bureau may have unique information about you while the other two do not.  

Credit Scoring Models Being Used May be Different

Credit bureaus also use different scoring models. There are literally dozens of different credit score models and each of them can give you a different score. Even online tools claiming to use your TransUnion or Equifax score, are likely using a different model than what your financial institution may be using when pulling your credit score from the same credit agency. 

How Do I Know What Model My Lender is Using?

Lenders usually have established relationships with one or more of the credit bureaus. You can ask your lender which credit bureau they purchase credit scores from. However, you can't request that the lender use a certain credit bureau to retrieve your score. 

Most lenders use the FICO score developed by FICO, the company formerly known as Fair Isaac. You can purchase your FICO score based on Equifax, Experian and TransUnion credit reports from myFICO.com

FICO Score vs Credit Score

fico score vs credit score

Credit score lingo can be confusing. At any given time, you might see the terms "FICO score", "credit score", "FAKO score" and even "VantageScore". What are all these different scores and what do they mean? Is there one "right"score?

Think of credit score as a generic term that refers to the numeric value given to your credit history. Your credit score is calculated using information contained in your credit report and indicates whether you have a low credit score or high credit score based on a variety of factors.

A FICO score is one of the most well-known credit score and you can think of it as a branded credit score. Developed and managed by a company called FICO, formally known as Fair Isaac, FICO scores are to credit scores as Jell-O is to jello. 

FAKO scores refer to any credit score that isn't an official FICO score purchased from MyFICO.comFAKO scores are typically just for educational purposes and don't necessarily reflect the scores that lenders use to approve your applications, because they use a soft credit inquiry to calculate your score. FAKO scores are usually what you will find in free credit score apps and websites. They are intended to help you monitor your credit score more regularly. 

VantageScore was developed in 2006 by Experian, TransUnion, and Equifax, just like your FICO score it uses an algorithm to predict how likely you are to repay borrowed money. It is used by lenders, landlords, and financial institutions to evaluate creditworthiness. Initially, VantageScore was on a different scale than FICO, but the most recent revisions have a 300 to 850 scale, just like a FICO score.

How Often Does Your Credit Score Update?

Credit scores don't change overnight, but they do change. Some things to keep in mind are:

  • Your score can change whenever your credit report changes: Your credit report can change for a variety of reasons, most notably, if you have late payments or if you add new debt or pay off a debt. 
  • Your score probably won't change much from one month to the next: Lenders report credit data at the end of each month, so the information transmitted may not have changed in a given month, depending on when you have paid off a debt or added a new debt.  
  • In a given three month period, only 1 out of 4 people will have a 20 point change in their credit score: While your score may change by a few points each month, a major point change will likely occur if you have several missed payments or add/pay off a new debt. 
  • Bankruptcies and other public records or collections can have a major impact on your score and it takes time to recover: Bankruptcies can cause your credit score to drop dramatically. The same can be said for being sent to collections, which happens when you are 60 or more days late on a debt payment. 

Is Checking My Score Really Worth It?

Even though the credit score you're seeing with a free credit score app or website probably won't match the exact score your lender receives, and doesn't usually change dramatically from one month to the next,  it's still important to check your credit score.

Your score will give you a general idea of where your credit stands and you'll get a good indication of whether you need to improve your credit or if the odds of getting approved for a credit card or loan are in your favor.

Keeping track of your credit score can also help you identify if you have been a victim of identity fraud. If you believe you have errors on your credit report it is important to dispute them right away.

Schedule an Appointment to Review Your Credit Report

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Managing Your Credit Score

The Best Ways to Manage Your Credit Score

There are many factors to take into account when looking at your credit score. Which can make knowing exactly how to manage it a bit confusing sometimes. Here we have pulled together five key tips to help you manage your credit score:

1. Maintain a solid repayment history

Your payment history is the biggest factor that can affect your credit score. If you are consistently a few days late on your payments your credit score can take a big hit. This is also one of the easiest areas of your credit score to manage since you are in control over when you pay your bills. 

  • Pay your bills on time, set up payment reminders or automatic payments. 
  • If you have missed payments, get current and stay current. 
  • If you are having trouble making payments, reach out to your lender right away for help. 
2. Manage the Amount of Debt You Owe

Owing money is not necessarily a bad thing when it comes to credit scores. The key is to be aware of how much you owe on revolving credit accounts such as credit cards. If you are close to "maxing out" your credit cards, it may be an indicator to a lender that you have overextended yourself. However, lower credit utilization is likely to have a positive impact on your credit score. 

  • Keep balances low on credit cards and other revolving debt.
  • Pay off debt. Don't move it around. Often people open credit card accounts with 0%APR introductory rates, and move their balances from card to card until the balance is paid off. 
3. Length of  Your Credit History

Length of credit history is another factor in calculating your credit score. A long history of credit accounts paints a picture of how you have managed credit over the years, and indicates to lenders your loan repayment behavior.  

For instance, if you've had vehicle loans in the past, and each has been paid off on time, or you've had a credit card for a number of years, and use it occasionally, this begins to build credit history.  You actually only need six months of credit activity to begin to build your credit score. 

4. Open New Credit Accounts Sparingly

Opening new credit accounts have an impact on your credit score. Obtaining too many credit cards to quickly, can negatively impact your score.  This is especially true if you're obtaining credit for the first time. Only open a new credit line if you actually need it. One or two credit cards should be enough to give you financial flexibility without becoming burdensome. 

5. Check Your Credit Mix

Credit mix considers the combination of credit cards, installment loans (like personal loans and vehicle loans), finance company accounts and mortgages you have. You don't need to have each type of loan, but you also do not need to open credit accounts if you don't need them. Simply  having one or two credit cards and an installment loan with good credit repayment history will help to raise your score.  

What If I Don't Have a Credit Score?

Not having a credit score isn't necessarily a bad thing. We all have to start somewhere. Building credit history is important, especially as you begin to think about purchasing a car or a home.  To start building a credit score, you need a minimum of three things: One trade line + 6 months payment history + activity in the last 6 months.

How to Build a Credit Score | First Alliance Credit Union MN

One Trade Line

A trade line is a credit account record that is provided to credit reporting organizations. A trade line can include a mortgage, line of credit, credit card, auto loan, home equity loan or any other credit-related item that is provided by a financial institution or lender. If you are just starting to build your credit then a low limit credit card is a great option for your first trade line. 

Payment History of at Least Six Months

To build a payment history, apply for a low limit credit card and begin charging items that you know you can pay off, like gas or groceries. Make sure you make on-time payments and pay off the balance each month consecutively for six or more months. 

Activity Reported in the Last Six Months

It is important to have activity on whatever credit account you do have. This doesn't mean that you have to use your credit card every day, but use it enough in a six month period to build a history of usage and make sure you make your monthly payments. 

what if i dont have a credit score

Disputing Errors on Your Credit Report

For your credit score to be a reliable source of information it needs to be an accurate reflection of your current credit accounts. However, sometimes errors do happen which can cause your credit score to be lower than it actually is.

This is why reviewing your credit report at least once a year from each major credit bureau is such an important part of managing your credit score.  If you do find any errors or inaccuracies listed on your credit report you will need to file a credit dispute to have the inaccurate information removed from your credit report. 

Errors can be any number of things from an incorrect address to credit lines that have been paid off to accounts that have never belonged to you, all of which can be corrected through filing a credit dispute

How to File a Credit Dispute:

To formally file a credit dispute with a credit bureau you will need to submit a formal dispute letter. This can be done by certified mail or online. Below are links to each of the online credit dispute pages for the three major credit bureaus.

When you submit your credit dispute you will need to include the following details:

  • A copy of your credit report with the items in question circled or highlighted
  • Name of the creditor the inaccuracies is coming from, such as lender or court
  • Identify the type of the item, such as an account or judgement
  • Describe in detail what is inaccurate or incomplete
  • Indicate whether you would like the item in question to be removed or changed
  • Provide any supporting documents to prove your dispute, such as pay off letters

You should also reach out directly to the financial institution listed as the creditor on your credit report for the specific reporting error as well. They may simply need to update their records to clear up the error. However, if you have a complex case due to identity theft it may be in your best interest to hire a consumer attorney or reputable credit counselor to help you navigate the dispute process.

How To Rebuild Your Credit

Chances are your credit score isn't as high as you would like it to be. Nearly one third of the U.S population falls in to the subprime lending category, which is a credit score of 620 and below.  And nearly 14% of the population is considered credit invisible, or has no credit score at all. If your credit score has decreased significantly, you are probably wondering what you can do to rebuild your credit. 

How Do I Improve My Credit Score?

There are many ways to improve your credit score, but beware of advice that provides a short-term, quick fix. The best advice for improving your credit score is to manage your existing credit responsibly over time. 

How Do I Improve My Credit Score

4 Tips to Improve Your Credit Score
  1. Make sure your payments are made on time each month. This is critical.  Set up payment reminders or set up automatic payments from your checking account. 

  2. Do not take on any more credit obligations, unless absolutely necessary. 

  3. Check your credit report and make sure the information is accurate. You are looking to make sure that you do not have any late payments listed incorrectly, and that the balances of your accounts are correct. If you find errors, make sure you dispute them with the credit agencies.

  4. Reduce the amount of debt you owe. Commit to paying down your credit obligations as quickly as you can. Make extra payments when you can. Consider using any bonus you receive, or even your tax return to pay down debt.

Want more information about improving your credit score? Check out this short video courtesy of KIMT News 3 featuring our Byron Branch Manager, Barb! 

How To Rebuild Your Credit

We all know that life happens. Divorce, health issues, emergencies, one or a combination of any life event can adversely impact your credit score. It's important to understand that credit scores don't change overnight, but taking the following steps will definitely help you rebuild your credit.how to rebuild your credit | how to improve credit score | how to build credit | credit scores | first alliance credit union mn

Pay All of Your Bills On Time, Every Time They're Due

Late payments, even if they are only a couple days late, and collections of any kind can have a seriously negative impact on your credit score. Paying all of your bills on time, every time is one of the best ways to improve your credit score

Get Current and Stay Current

If you have missed payments, even one or two, it's important to make sure you get your accounts current and make sure they stay current. If you find yourself struggling every month to keep up with your bills, it's important that you reach out to your creditors right away. In many cases, they can help you restructure your debts, maybe give you a month or two of breathing room between payments, and help you get set up on a budget.

Managing Your Credit Card Balances Can Increase Your Credit Score

The amount of credit used on your credit card lines can negatively impact your credit score. Having balances greater than 50% of your credit limits can negatively impact your credit score. It's important to either keep your balances low compared to your credit limits, or ideally, pay your balance off in full each month, which will help increase your credit score.

Another option that may help is debt consolidation. With debt consolidation, you take all of your credit card balances and combine them into one loan, with one interest rate and one monthly payment.  This can definitely help you manage paying off debt and can even give your credit score a boost in some instances.

budgeting calculator

Don't Apply for Credit You Don't Need

I know its appealing to get a discount when you apply for a store credit card. Especially when they offer discounts like 25% off. The thing is with store cards, is that the limits are usually low and the interest rates are pretty high. Having multiple credit cards with balances can negatively impact your credit.

Credit Cards and Installment Loans Can Improve Your Credit Score

Credit cards are not all bad. If you are keeping your balance to credit card limit below 50%, and making your payments on-time each month, then you will have a higher credit score. The same can be said for installment loans, like auto loans and mortgages, where you are making a fixed monthly payment on time each month.

Even If You're Not Using Your Credit Cards...Don't Close Them

Often people think that if they close credit cards they aren't using it will help boost their credit score. In fact, the opposite can happen. A part of your credit score is the longevity of accounts and the longer your credit history, the more positive it is for your credit score.

how to rebuild your credit | how to improve credit score | how to build credit | credit scores | first alliance credit union mn
If You Don't Have Credit Don't Move Too Fast

When you're trying to establish a credit score it's important that you don't move too fast, accumulating too much credit too quickly. It's not necessary to open a bunch of credit cards to start building a credit score. In reality, it's best to get one credit card and practice with it. 

Remember, Rome wasn't built in a day and credit isn't built or repaired in a day. It takes patience, time and persistence. Commit to your plan for rebuilding your credit score and stick with it. You will most definitely see results and your financial future will be brighter. 

Schedule an Appointment to Review Your Credit Report

Let one of our financial experts walk you through the ins and outs of your credit report and what it means for your financial future. 

Get actionable insights into each part of your credit report and how those factor into your credit score. 

No judgement, only guidance.