Word of the Day Wednesday: Credit Score
Each Wednesday, MEFA will feature a Word of the Day where we'll highlight a word (or sometimes a phrase) related to the college planning process. This month, we're focusing on vocabulary related to college loans.
Today's Word of the Day is Credit Score.
In last week's Word of the Day Wednesday post, we defined credit report, and explained how each person's credit report is created by credit reporting agencies. A credit score is a calculated number based on the information in an individual's credit report, and is intended to summarize that person's credit history. Lenders review credit scores when making lending decisions on loan applications.
Each of the main credit reporting agencies (Equifax, Experian, and Trans Union) calculates a credit score based on its own model. This means that one person can have several different credit scores, depending on the credit reporting agency calculating each score. A separate company, Fair Isaac Corporation (FICO), has created its own credit score, the FICO score, which is the most common credit score used by lenders to evaluate credit history. FICO uses five different data points to calculate their score, with different emphasis on each category.
The different credit score calculations fall within varying ranges, though the majority of credit scores extend from roughly 300 to 850. Though credit scores are traditionally only available for a fee, some credit card companies associated with bigger banks have begun providing credit scores to their own customers free of charge. In addition, some websites, including myBankRate and Credit Karma, provide free credit scores to everyone willing to submit select personal information.
Why does this matter to you?
Lenders use your credit score as an indication of how likely you are to pay back a new debt based on prior borrowing behavior. Not only can your credit score determine if you qualify for a new loan, it can also determine what rate you receive. For this reason it's very important to be aware of your credit score, along with the details of your credit report, and to make sure there is nothing that is being reported incorrectly that could affect your score.
Understanding how a credit score is calculated is important to obtaining and keeping a high credit score. Here is some advice to help maintain a good credit score:
- Pay your bills on time
- Avoid credit card debt
- Avoid using all available credit
- Don't apply for too much credit
- Check your credit report at least once a year from each credit reporting agency
As you continue to make your plans to pay for college, reach out to us here at MEFA with any questions. You can find us on email, Twitter, Facebook, or over the phone at (800) 449-MEFA (6332). And if you would like to apply for a MEFA loan, visit our loans page here.
Francis Cavanaugh joined MEFA in December 2006 and serves as the Director of Portfolio Origination and Funding. Prior to joining MEFA, he held various management positions in finance and operations in the manufacturing and distribution industry.