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A REVIEW OF THE TEXAS ECONOMY
April 2024 | Jessica Donald and Dan Olsen
Credit score: A number that can cost or save you money.
Credit scores, a single number representing a person's credit risk, influence many aspects of your life such as loan interest rates, car insurance premiums and housing options. So, in the long run, a good credit score can save you money.
Credit Score Formulas
Credit scores are determined by algorithms based on five categories of varying weights used to generate reports. These reports factor in credit history, bankruptcies, liens and more. While there is no single type of credit score or standard report, Fair Isaac Corporation (FICO)-developed scores are used by 90% of top U.S. lenders.
Credit Score considerations
Meter showing:
- poor credit: 300 to 579
- fair credit: 580 to 669
- good credit: 670 to 739
- very good credit: 740 to 799
- exceptional credit: 800 to 850
Payment History
Try to make timely payments — one 30-day-late payment isn't as damaging as repeated or extensive delays. Late payments and bankruptcies usually disappear from credit reports after seven and 10 years, respectively.
Amounts Owed Relative to Limits
Maintain a low balance-to-limit ratio. Keep your credit card balance low and prioritize timely payments for larger loans such as mortgages, car loans and student loans.
Length of Credit History
Along with a history of making timely payments, older, positive accounts can enhance your credit score.
Frequency of New Credit
Too many newly issued lines of credit – whether new loans or new credit cards – can cause lenders to become concerned about your ability to repay all of this new debt, making them less likely to lend you money.
Types of Credit Used
Lenders favor diversity in credit types. A balanced mix of credit card debt, installment loans, mortgage loans and student loans, managed well, is more likely to yield a higher score than only handling credit card debt.
Additional options
Regularly monitor your credit to manage finances and detect errors or fraud. A 2021 Consumer Reports survey revealed that more than a third of respondents found report errors. Federal law permits a free annual credit report from each of the three credit bureaus. Many banks and other services offer free credit score checks too. While using these tools won’t affect your score, "hard inquiries" like loan applications can.
An estimated 45 million Americans are credit unserved or underserved…
That means they lack traditional credit products like credit cards or loans, making life challenging as credit scores influence tenant screening, interest rates, and insurance premiums.
Source: Federal Reserve Bank of St. Louis