Understanding Your Credit Score

When applying for financing, the term “credit score” is sure to come up in conversation. We asked Jody Almand, VP of Credit, and Justin Carter, Executive Vice President Chief Credit Officer, to answer frequently asked questions regarding credit scores.

What is a credit score?

A credit score is a number used to anticipate future behavior based on historic management with other creditors. Simply put, it tells potential lenders how reliable a potential borrower is based on past lending history.

What factors affect a credit score? Many factors can affect or influence your credit score. These include:

• Past payment history: Paying your bills on time is one of the most significant factors when calculating your credit score, and doing so will allow you to keep your score strong.
• The number of open accounts you have: Any time you open a new account, it adversely affects your credit score, including applying for new loans and credit cards. Having multiple retailers can affect your score over time.
• Length of time accounts have been open: Opening several accounts in a short amount of time can hurt your credit score. Newer accounts can bring down the average age of your credit history, lowering your credit score.
• Percentage of outstanding balances of credit cards compared to the credit limit: Having and keeping high balances on credit cards can hurt your credit score. Keeping credit card debt to a minimum is best to keep a healthy score.
• Collection accounts: When debt is sent to a collection company and reported to the Credit Bureau, it will negatively impact your score. This stays on your report and adversely affects the score for up to 10 years, regardless of payment status.
• Bankruptcies: Filing for bankruptcy will stay on your credit report for years. It can continue to hurt your credit score for 10+ years.
• Number of times your credit is pulled: When lenders pull your credit score, it is considered a hard hit. One hard hit per year does not damage your score, but multiple within a year can negatively impact your credit score. Some businesses will pull a soft hit on your credit report to avoid this. Soft hits do not affect your score negatively.

Why is a credit score important?

The theory that past behavior predicts future performance makes credit scores very important. Lenders consider credit scores one of many factors to determine a borrower’s creditworthiness.

Why do lenders use credit scores?

A credit score gives lenders a strong indication of how a borrower will perform with the proposed loan. If they have shown a strong repayment history, it is a better indication that they will continue to manage their financial matters well.

What are the different types of credit scores? Which does Farm Credit use?

Three companies report to the credit bureau and assign a FICO score. These three companies are Equifax, Experian, and TransUnion. Farm Credit utilizes TransUnion to obtain credit scores for our borrowers.

What is a good credit score/range?

• Credit scores can range from 300 – 850. A score above 700 is considered good and shows that the borrower has managed well in the past. A score that falls between 650 and 700 would be considered moderate. A score below 650 is considered weak. As with anything, these scores are subjective. 
•  Some scores in the moderate range do not automatically denote poor performance, as one recent delinquency can initially hurt your score. The credit score improves as more time passes from the late payment. Many factors affect the credit score, as explained above. Farm Credit analyzes the entire credit report and not merely the score.

How can you improve your credit score?

The best way to improve your credit score and keep a strong one is to pay your bills on time. If your score is weak, you will need to begin paying all bills on time and allow ample time to see your score improve. Credit scores do not improve overnight, nor is there a trick to bring a score up quickly. Diligence in paying your bills on time will elevate your score.

How can you check your credit score?

Several websites provide a free credit score. Most of these only pull the score and are considered “soft hits” on your credit reports. Soft hits do not adversely affect your score. You are allowed one hard hit on your credit report each year that will not hurt your score. Doing this annually is a good idea to ensure there are no fraudulent charges on your credit report.