Credit: The Good, The Bad, & How to Improve Your Score

Friday, Jul 23

Why Your Credit Score May Vary:

There are three credit reporting agencies, TransUnion, Equifax, and Experian – and when obtaining your personal credit score it is important to remember that while the information contained in each report tends to be very similar, each of the reporting agencies utilize different criteria to calculate your final score. Each report will include personal information consisting of an individual’s name, date of birth, address, and employment history as well as a summary of accounts, public records (liens, judgments, bankruptcies), and a list of past inquiries.

This is where the similarities stop. Each of the credit scoring models evaluate the same main factors, but use their own formula to weigh each factor, and may also use different scoring ranges. In addition, there are dozens of different versions to each credit scoring model, broken into base and industry specific scores (auto vs. home mortgage vs. business loan).

An individual’s FICO score – the credit score used most widely by lending institutions – may be different at each of the credit reporting agencies and depending on the version utilized by that lending institution, may vary from institution to institution. As an example, the most recent version of the FICO score (FICO 9) lessens the negative consequence to consumers with medical collection items or those with smaller, less established credit profiles than previous versions of the FICO score. These changes to the FICO algorithm could result in an increased score under the FICO 9 model vs. previous versions.

Obtaining a personal credit score should give you a good indication of your overall credit health, however, due to the significant number of variables involved in the calculation of the score, it is likely to have some variation from reporting agency to reporting agency, as well as institution to institution.

If your annual revenue for 2020 is 25% lower than 2019, you can also use the entire year as the time-period in lieu of a specific quarter.

Entities not in business during the 1st and 2nd quarters of 2019 can compare any quarter in 2020 to the 3rd or 4th quarter of 2019.  Entities that were only in business during the 4th quarter of 2019 can compare any quarter in 2020 to the 4th quarter of 2019.  If you were not in business during 2019 but were in operation on February 15th, 2020 you must demonstrate that revenues in the 2nd, 3rd or 4th quarters of 2020 were 25% less than the 1st quarter of 2020.

Factors Affecting Your Credit Score

In order of importance, each credit scoring model evaluates the following factors:

  1. Payment history – Whether you have paid your past credit accounts on time or not.
  2. Amount owed & utilization rate – How much do you owe, and do you have available credit or not.
  3. Length of credit history – How long your credit accounts have been established.
  4. Credit mix – What your mix of credit card, retail accounts, installment loans and mortgage loans is.
  5. New credit – Amount of new credit requests you have made and opened in the past 24 months.

What is a good credit score, and can I still qualify for a loan with a below average credit score?

Credit scores range from 300 to 850 depending on the credit scoring model, broken down as follows:

  • 300-599 = Poor
  • 600-669 = Fair
  • 670-739 = Good
  • 740-799 = Very Good
  • 800+ = Excellent

A below average credit score typically will not disqualify you from obtaining a loan. Our Bank will evaluate the entire picture of the applicant and how the credit report fits with the rest of their financial makeup. Many times, an individual score is not the focus, but rather what contributes to that score and the story behind it. Often, we can overcome concerns by gaining a full understanding of the cause and what the applicant has changed to prevent future credit issues.

Want to Learn More?

Gary Kiess

Gary has 15-years of banking experience, with a background in several areas including commercial real estate, construction, small business financing, as well as financing under the SBA and USDA programs.

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