Credit Scoring 101

By: Laura Jones

Source: Corporate Communications

A refresher on credit scores – how they are calculated, why they matter, and how they change over time. Plus, learn what WaMu is doing to educate customers about using credit responsibly.

Quick…what’s your credit score? If you don’t know, you’re not alone. Two-thirds of Americans don’t have a clue.

That’s astounding since a consumer’s credit score influences many aspects of his or her financial world.

What it is

When people talk about "your score," they're usually talking about your current FICO^® score, a three-digit number generally ranging from 300 to 850.

The FICO name is derived from the company that invented the scores -- Fair Isaac Corporation. In the late 1950s, the Fair Isaac Corporation began developing scoring models to attempt to measure the likelihood that credit users would pay their bills. Since then, the FICO score has become the industry standard for measuring credit risk. The higher the score, the lower the risk.

How scores are calculated

Credit scoring is a complex process, involving factors such as whether you pay your bills on time and the length of your credit history. Never using credit, in fact, actually can hurt you because you will have no record to rate.

FICO scores are calculated from data pulled from credit reports provided by all three major credit bureaus (Experian, Equifax and TransUnion). In fact, you may actually have a different FICO score with each of the three bureaus. Data is grouped by:

·       Payment history

·       Amounts owed

·       Length of credit history

·       New credit

·       Types of credit used

However, FICO is not the only credit scoring system used by lenders. Some, like WaMu Card Services, have developed their own proprietary models they use in conjunction with FICO scores. All scoring models serve to determine a consumer’s credit risk and help the lender decide how much credit to extend and the cost of that credit.

It’s important to remember that a credit score is a fluid number that changes with a consumer’s credit history and profile. For example, the score can rise when the consumer takes positive steps, such as making a series of on-time payments or paying off a balance. It can fall with negative actions such as missing payments or defaulting on a loan. By the way, your FICO score is not affected by your income. Income may well be part of a lender assessment, but it is has no bearing on your FICO score.

What Else is NOT in a Credit Score

·       Race

·       Religion

·       National origin

·       Sex

·       Marital status

U.S. law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.

What is WaMu doing to educate its customers about using credit responsibly?

WaMu encourages customers to maintain good credit. WaMu was the first – and is currently the only – major credit card company that provides customers with free online access to their FICO score.

WaMu card customers also have access to a variety of online credit education tools, including simulators that demonstrate how positive and negative credit behaviors such as paying late or reducing debt, generally impact a consumer’s credit score.

In addition, WaMu offers a Credit Card Basics class covering what a credit card is, how to establish credit, the advantages and potential drawbacks of using a credit card, understanding credit card terms, and tips for using credit wisely. WaMu employees often teach these courses in partnership with non-profit organizations.

For more information about FICO scores, visit myFICO.com, a division of the Fair Isaac Corporation.