Two of the nation’s biggest credit bureaus recently agreed to provide $17.6 million in restitution and pay fines totaling $5.5 million to settle allegations that they misled consumers about the cost and usefulness of their credit monitoring services.
Credit monitoring has become a big business, and for a good reason. Your credit score is a crucial factor in getting the best rates on a mortgage, credit cards, personal loans, and auto loans. Depending on the loan, improving your credit score can save you thousands of dollars in interest payments.
A good credit score can also help you get the best interest rates when refinancing student loans. If you’ve looked into student loan refinancing and didn’t get the rate you’d hoped for, you can take some simple steps to improve your credit score, and then try again. Even a small improvement in your credit score can get you a better rate if you’re on the cusp of being classified as a more reliable borrower.
Let’s take a closer look at what your credit score is, how you can keep track issues that affect it, and what you can do to improve it.
Whenever you’re ready, you can see whether your efforts have paid off by using Credible to see the actual rates you prequalify for with multiple lenders, without sharing your personal information with them until you’re ready to proceed with an offer. Using Credible to check your rates won’t affect your credit score.
What is a credit score?
Although there are many types of credit scores, lenders typically rely on FICO scores, which are generated by proprietary scoring models developed by Fair Isaac Corp.
Whatever credit scoring model a lender uses, you need to run data that’s collected about you by any of the three big credit bureaus through that model in order to generate a score. Each of the credit bureaus — TransUnion, Equifax, and Experian — collects information about you, such as who’s loaned you money, how much you owe, and how good a job you’ve done paying it back. That information is found in your credit report.
FICO scores range from 300 to 850. In theory, the higher the score, the more reliable a borrower will be about paying back their loans.
What’s a good FICO score? Borrowers with scores below 620 are sometimes characterized as “subprime,” and because lenders view them as risky, they frequently charge them higher rates — if they’ll lend to them at all.
Borrowers with FICO scores of 740 or above are sometimes classified as “super-prime,” and lenders compete for their business by offering them better rates. You don’t have to be a super-prime borrower to qualify for student loan refinancing — more on that later.
On the myFICO blog, Fair Isaac Corp. characterizes FICO scores in five ranges:
- 800 and above: “Exceptional” — only 1 percent of borrowers with scores in this range are likely to become delinquent
- 740-799: “Very good” — about 2 percent of borrowers in this range are likely to become delinquent
- 670-739: “Good” — about 8 percent of borrowers in this bucket are likely to end up delinquent
- 580-669: “Fair” — odds are about 28 percent will become delinquent
- 579 and lower: “Poor” — about 61 percent are likely to become delinquent
How can I track issues that affect my credit score?
Your credit score will change as new information is reported to the credit bureaus, or as the impact of adverse events like missed payments fades over time.
Lenders rely on different credit scoring models that are constantly being updated. They may plug information from credit reports produced by any credit bureau into those models. So your credit score is always changing, and there’s no single credit score — FICO or otherwise — for any one person at any given point in time.
The information that one credit bureau has collected about you in a credit report may not be exactly the same as what’s on file with another. One bureau might be missing some information that could help your credit score — that you’ve got an auto loan and have never missed a payment in 3 years, for example. Another bureau might have erroneous information that could hurt you (“Hey, that dentist’s bill isn’t delinquent — I paid that last year!”).
To help you stay abreast of these issues, you’re entitled to obtain a free copy of your credit report from each credit bureau every 12 months — the official site to request the reports is AnnualCreditReport.com.
In addition to errors, the Consumer Financial Protection Bureau advises that you check your credit report for suspicious activity that could be evidence of identity theft or fraud — like addresses of places you’ve never lived, or names of employers you didn’t work for.
To make the job easier, all three of the credit bureaus offer credit monitoring services — for a fee. The services, which provide access to different credit scores and credit reports, are touted as useful tools for building up your credit score and detecting identity theft. They include:
- Experian CreditWorks — $19.95 per month. Track your FICO score over time, get alerts when your score goes up or down, or when there are important changes to your Experian credit report.
- TransUnion credit monitoring service — $9.95 per month. See your TransUnion credit report and TransUnion Score any time. Personalized debt analysis and credit score trending. “Score Simulator” shows how credit choices may affect scores.
- Equifax Complete Premier Plan — $19.95 per month. Credit file monitoring and automated alerts of key changes to your Equifax, Experian, and TransUnion credit files. Access to Equifax credit score based on the Equifax Credit Score model.
Fair Isaac also offers credit monitoring services through myFICO.com, including:
- FICO Essentials 1B — $19.95 per month. Monitoring and instant access to Equifax credit report and FICO score.
- FICO Ultimate 3B — $29.95 month. “Three-bureau” (Equifax, Experian, and TransUnion) credit report, quarterly access to most widely used FICO scores.
Free credit monitoring
You’ve probably seen ads that are all over TV and the Internet for free credit monitoring services like Credit Karma. Credit Karma, which also offers tools and tips to help you improve your scores, provides free access to TransUnion and Equifax credit scores.
In announcing a settlement with TransUnion and Equifax, the Consumer Financial Protection Bureau noted that the credit scores provided by those companies with its credit monitoring services weren’t the FICO scores typically used by lenders. Regulators also said many consumers didn’t realize that they were enrolling in costly subscription programs.
In welcoming the CFPB’s action, National Consumer Law Center staff attorney Chi Chi Wu put forward a do-it-yourself, free “credit monitoring” strategy for consumers.
The Fair Credit Reporting Act (FCRA) gives you the right to request a free copy of your credit report from each of the credit bureaus every 12 months. Wu suggested using the official website for obtaining the reports, AnnualCreditReport.com, and staggering your requests so you obtain one report from each bureau every four months.
You can also buy access to your credit score through the site — the Fair Credit Reporting Act allows companies to charge “a reasonable fee.”
But Wu noted that these days, it’s easier to get a free copy of your FICO score, too, if you’ve borrowed money from a company that participates in a program called FICO Open Access.
Participating lenders — including credit card issuers, mortgage servicers, auto lenders, and student loan providers — are sharing FICO scores with more than 150 million account holders.
Discover Bank even provides free FICO scores to non-customers through a dedicated website, CreditScore.com. The scores are based on information collected by Experian (Editor’s note: In February, 2017 The Wall Street Journal reported that Experian has begun offering free FICO scores through freecreditscore.com, becoming the first non-bank website to do so).
“While there is no one credit score, a FICO score from your credit card lender is one that is probably being used by that lender,” Wu said.
How to improve your credit score
Now that you’ve got a handle on how to track the information that affects your credit score, how do you go about improving your score?
The chart below shows how much impact several different factors have on your FICO score. Note that your payment history and amount owed account for nearly two-thirds of your score, suggesting this is a good place to start.
Given that payment history is 35 percent of your score, it goes without saying that going forward, paying bills on time should be a top concern. If you’ve had late payments in the past, don’t lose too much sleep over them — the impact they have on your score diminishes over time. After 7 years, most records including collections, foreclosures and bankruptcies, are removed from your credit report altogether.
When it comes to amount owed, you can do more than wait. You can improve your credit score by paying down debt — high-interest debt is a good place to start.
But there’s more to amount owed than the total amount of money you’ve borrowed. The FICO score also looks at your credit utilization — how much of your available credit you are using. If you have a credit card with a $3,000 limit, for example, and you are carrying a balance of $1,000, you’re utilizing 33 percent of that card’s limit.
That’s a hair above the 30 percent threshold that experts say can start hurting your credit score once you cross it. So if you’re carrying balances on several credit cards, pay attention not only to the interest rate, but the credit utilization on each card. NerdWallet offers a handy calculator for tracking your overall credit utilization, and your utilization for each card.
The large impact credit utilization plays in determining your credit score underscores an important point — if you’ve just landed a new job or a pay raise, you might want to think twice about celebrating by buying a new car or taking an expensive vacation. If you borrow money to pay for them, those indulgences could end up costing you a lot more than their face value. You’ll not only be paying interest on those debts, but you may be sabotaging opportunities to get better rates on loans you take out in the future.
If you use a pay raise to pay down debt and lower your credit utilization ratio, you may see a dramatic improvement in your credit score. That improvement in your credit score could help you get a better rate on student loan refinancing. Refinancing your student loan debt can help you tame your debt-to-income ratio, and help you qualify for other loans that can help you realize life goals like starting your own business or becoming a homeowner (for more on how student loan debt can thwart such plans, see “How student loan debt can get you off on the wrong foot“).
Remember that paying off all your debts isn’t always the best strategy, either. In some cases, myFICO advises, maintaining a low credit utilization ratio will help your FICO score more than not using any of your available credit at all.
How can I see if my improved credit score will get me a better rate on student loan refinancing?
If you’ve applied to refinance your student loans in the past but weren’t offered the rates you’d hoped for, it’s easy to see whether the work you’ve done to improve your credit score will get you a better rate.
Credible’s deep integrations with lenders and all three major credit bureaus allow us to show you the actual rates you prequalify for with multiple lenders, based on your credit history, credit scores and individual circumstances. You can get personalized rates in less than 2 minutes without filling out a lengthy form or sharing your personal information with lenders until you’re ready to proceed with an offer (for more on how this process works, see, “How Credible matches you with lenders“).
Best of all, considering the work you’ve put in to improve it, checking your rates won’t ding your credit score. When you request personalized rates from Credible, you’re authorizing a soft credit inquiry, which doesn’t affect your score. Checking your credit report before you apply for a loan is also considered a soft inquiry.
Once you choose a lender to move forward, that lender will typically perform their own “hard inquiry.” Applying for a credit card, mortgage or auto loan also generates a “hard inquiry” on your credit report, and multiple hard inquiries can lower your credit score.
But if you’re applying for a student loan, mortgage, or car loan, hard credit inquiries received in the 30 days before a FICO score is generated won’t harm your score. The newest versions of the FICO scoring formula allow for a 45-day “rate shopping” period.
Getting the best rate
You don’t need a six-figure income or a “super-prime” credit score to qualify for student loan refinancing. Recent graduates 27 and younger are using Credible to refinance student loan balances ($49,379) that are nearly as large as their annual salaries ($54,200). Many lenders will provide offers to borrowers with a credit score as low as 620 if they have an eligible cosigner.
Keep in mind that the rates you’re offered will also depend on your loan term. All other things being equal, the shorter the repayment period, the lower the interest rate. So refinancing into a loan with a shorter loan term can often be the best strategy for getting the lowest interest rate.
Borrowers who are more interested in reducing their monthly payment may choose to refinance into a loan with a longer repayment term (for more on different strategies borrowers employ when refinancing, see “3 winning student loan refinancing strategies for recent grads“).
Credible’s partner lenders offer refinancing on 5, 7, 10, 12, 15 and 20-year repayment terms. The ability to see the rates you prequalify for on different types of loans from multiple lenders is another reason that thousands of borrowers have used Credible to find a loan that’s the best fit for their needs.
Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit scores.