The CT Department of Higher Education, in partnership with UConn and CPTV, has created a new online program, "Who Wants to Be Financially Responsible?" to educate students about money management in an interactive game format. Check out Episode #7: FICO Credit Scores for more information on this topic.

What is a credit score?

Your credit score is created using a mathematical formula measuring data from your credit report.

• Credit scores are used by lenders, insurers, landlords, employers and utility companies to evaluate your credit worthiness.
  
• Having a high credit score will aid you in receiving the best rates on new credit and loans.
• Your credit score will also affect how much you are charged for insurance, whether or not some landlords will rent to you, whether or not you will have to pay a large deposit when turning on utilities, and even whether some employers will hire you!

Fair or not, your credit score has a big impact on your future. It is crucial that you start off on the right foot and protect your credit score from the beginning. In order to keep your score high, it is important to know how it is calculated.

Factors used in credit scoring are:

• Payment history
• The amount of credit to which you have access
• The amount of credit you are currently using
• The length of your credit history
• Recent credit inquiries

Payment History

Negative records like collection accounts, charge-offs, judgments and bankruptcies can cause substantial damage to your credit score. These records will remain on your credit report for seven to ten years, whether or not the debt has since been paid off. If you are in this situation, you can improve your score by paying your bills on time, reducing your debts and using credit responsibly. The impact of past credit problems on your score fade as time passes and as recent good payment patterns show up on your report.

Consistent non-payment to a lender or creditor may result in your account being referred to a collection agency. If you continue to fail to pay, your lender may "charge off" your account, which means the lender has given up in trying to collect funds from you and has "written off" your debt as an expense. Charge-offs significantly damage your credit score. Other bills, such as medical bills, utility bills, and cell phone bills can also be sent to collection agencies. If your lender or creditor (company to which you owe a balance) takes you to court because of non-payment and the judge orders you to pay, this is referred to as a judgment.

Available Credit

Available credit is the sum of your total credit limits minus any balances you owe. The percentage of credit that you have used is calculated by taking your balance dividing by your total credit, then multiplying by one hundred.

Your available credit has a direct impact on your credit score. Balances above 50% are usually considered high. It is a good idea to keep your credit usage in the low to moderate level. Using a low percentage of your available credit and making payments on time shows lenders you can use credit responsibly.

Example: High Credit

Credit limit = $2500

Balance (the amount you owe) = $1300

Available Credit = $2500 - $1300 = $1200

Percent of credit used = $1300 / $2500 * 100 = 52%

Example: Low Credit

Credit Limit = $2500

Balance (the amount you owe) = $875

Available Credit = $2500 - $875 = $1625

Percent of credit used = $875 / $2500 * 100 = 35%

Current Credit Usage

Having credit available (refer to above paragraph on Available Credit) to you is a sign that your are able to manage your finances responsibly. Lenders like to see that consumers have a large amount of credit available to them, however not so much that you could not afford to pay it back.

Length of Credit History

The longer your accounts have been opened, the better they are perceived by the lenders. It is a good idea to use one or two credit cards for a long length of time, keeping the balances low, making monthly on time payments (paying more than the minimum payment due if possible). Opening additional new accounts can cause your credit to appear unstable.

Recent Credit Inquiries

When you are financing a purchase, the creditor will want to check your credit score before they approve or deny your application. This is referred to as a credit inquiry. Credit inquiries can impact your credit score if there are a large number of inquiries within a short period of time as people with six or more credit inquiries can be up to eight times more likely to declare bankruptcy. Some lenders perceive a lot of inquiries in a short period of time to indicate that you are having difficulty getting more credit. (i.e. you are applying for a lot of credit but are being denied).

When you request a copy of your own credit report, it does not count as an inquiry. Also other inquiries that do not affect your scoring are when a lender has made an inquiry in order to send you a "pre-approved" credit offer. Inquiries that are marked as coming from employers are not counted either.

The score allows for "rate shopping" for certain typed of products. When you are shopping for a home mortgage rate or car loan, you are apt to have several credit inquiries. If you shop within a short period of time, such as fourteen days, your inquiries are distinguished between a search for a single loan and a search for many new credit lines. Note that this is not true for all products. For example, private student loans are not protected in this manner. If you apply for more than one private student loan, your credit score may drop a few points.

How Do I Obtain a Copy of My Credit Report?

Federal Regulations allow you to obtain a free copy of your credit report from each of the three nationwide consumer credit reporting companies (TransUnion, Experian, and Equifax) once every twelve months. You can obtain a copy by accessing http://www.annualcreditreport.com/ or make your request by telephoning 1-877-322-8228.

• If you are denied credit, you are entitled to a free copy of your report from the reporting agency if you request it within sixty days.

• Be wary of other companies that claim to offer a free credit report. If you read the fine print on these products, you may find the credit report is only "free" if you subscribe to another service (for which you pay). AnnualCreditReport.com is the only website that will truly give you your free credit report.

Other Resources

• Annual Credit Report The only free Credit Report website.
• myFiCO A helpful website for managing your credit.
• What's My Score You can estimate your score using the free FICO Score Estimator at What's My Score, a financial literacy program run by Visa.

Charge-off: If a loan or credit card is deemed "uncollectible", it may be charged off. This has a very negative affect on your credit score.Minimum Payment: The minimum monthly payment required on a credit card or loan. For credit cards, this is typically 2% of your balance (changes month to month).