Filed under: Personal Finance, Dr. Boyce Money
Given the growing importance of credit scores in our economy, I thought I would do a Dr. Boyce Money series on credit scores and how they affect your life. These might answer many of the questions you have about your credit report and how the scores are calculated. We will also cover your rights as a consumer and how you might improve the score you’ve got. Enjoy!
Who are the major credit bureaus and where do the scores come from?
In the US, there are 3 major credit bureaus, Experian, Trans Union and Equifax. These are the three agencies that others can ask for credit information about you. Under the old system, your score would range from 375 to 900. There is a new system in place with VantageScore, which ranges from 501 to 990. The system is considered more consistent across the various bureaus, but it does not change much in terms of your credit worthiness. So, if you were a AAA borrower before the fact, you are going to be one now.
How can I get a copy of my credit report?
One way to get a copy of your report is to go to Myfico. You can order a report from any of the 3 bureaus, or you can order all 3. Another method for obtaining a credit report is to go to free sites such as freecreditreport.com (although there are conflicting viewpoints on whether this service is actually free). Under the law, the reporting agencies are entitled to give consumers at least one free credit report every year. Also, if you are denied credit for any reason, you can send a copy of the rejection letter to any credit bureau and receive a free credit report. Otherwise, the report is going to cost you about $8.
How is a credit score calculated?
The model for credit reports is based on what they call “The 4 C’s of Credit”: Character, collateral, capacity, capital and conditions. What are they?
Character is their way of trying to decide if you are a good person or not. Effectively, if you have a history of not paying your debts, they define you as not having the character to repay. This is a bit silly, since some people don’t repay their debts because they are having financial trouble, not because they are bad human beings.
Collateral is represented by assets you are willing to pledge against the loan as additional security in case you aren’t able or willing to pay.
Capacity is represented mostly by income level and future earning opportunities.
Capital is reflected mostly in your cash reserves, and other relatively liquid investments. High capital implies that you can pay the fees that are owed.
Conditions are things that are basically out of your control: the state of the economy, your line of business, or any other issues on your credit report that do not necessarily reflect personal choices made by you.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of the forthcoming book, “Black American Money.” To have Dr. Boyce commentary delivered to your email, please click here.
