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FDIC Consumer News - Summer 1999

Important Update: Changes in FDIC Deposit Insurance Coverage

The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.

What's the Score on Your Credit?

Lenders use automated "credit scoring" systems to help them make decisions on loan applications. But you can improve your score and your chances of getting a good loan.

One way lenders quickly evaluate thousands (and sometimes millions) of loan applications is by using automated "credit scoring." Even if you have no plans to apply for a new loan soon, we think you should know about credit scoring. Why?

Because the next time you do want a mortgage, car loan, credit card or other type of loan, your credit score could affect the interest rate you are charged. It could determine the repayment terms and other conditions of the loan. Your credit score could even play a role in whether you are approved for the loan. To be on the winning side of this scoring system, it helps to know the basics.

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What Is Credit Scoring?

Credit scoring is a tool that's designed to enhance a lender's ability to determine the likelihood that a consumer will repay a loan. It's based in part on credit scoring "models," which are computerized systems that look at a variety of factors (sometimes hundreds) relating to many consumers' credit histories and personal information, such as age, income and level of outstanding debt.

Scoring systems collect this data to try to predict a consumer's willingness and ability to pay future debts. Credit scoring systems usually produce a numerical score—a credit score. Lenders use these scores as tools to help decide if a loan should be made and to set repayment terms.

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If a Credit Score Is Low

A credit score in the lower ranges doesn't automatically disqualify you from getting a loan. But it may prompt the lender to review your qualifications more carefully before deciding whether to approve or deny the loan. Or, a low credit score may result in a higher interest rate or more stringent repayment terms than those offered to other consumers.

If a lender's scoring system is properly designed, tested and monitored, it should give a faster and more impartial evaluation of creditworthiness than a loan officer could have made on his or her own.

A credit score, however, can be an imperfect way to try to predict whether someone will default on a loan. Among the reasons: the information that was reported to the company that developed the scoring model (perhaps a credit bureau) may be inaccurate or the statistical assumptions behind the program may be unsound.

Credit scores generally are not released to consumers. But under the Fair Credit Reporting Act, if you are rejected for a loan because of inaccurate information in a credit report, you have a right to get a free copy of that credit report and to have mistakes corrected. Catching and correcting any mistakes may have a positive effect on your credit score and could improve the chances that your loan will be approved.

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Improving Your Score

Just like building your own credit history takes time, it also takes time to significantly improve your credit score...and your chances of getting a loan at favorable terms. According to a consumer brochure published by the Federal Trade Commission (FTC), you can boost a low credit score by "concentrating on paying your bills on time, paying down outstanding balances, and not taking on new debt."

We also believe it's a good idea to review your credit report periodically, to make sure it accurately reflects your credit history. That way you can provide missing details or fix inaccurate information before it gets factored into your credit score and you're in a rush to get a loan.

For a copy of your credit report (maximum charge currently $8 under the law), call any of the three major credit bureaus at these toll-free numbers: Equifax at (800) 685-1111, Experian at (888) 397-3742, and Trans Union at (800) 888-4213. Credit report content may vary significantly among the credit bureaus, so you may want to request copies from all three companies.

For more information about credit reports and credit scoring, the FTC offers several free publications, including: "How to Dispute Credit Report Errors," "Fair Credit Reporting" and "Credit Scoring." For these and other FTC consumer publications, write the Consumer Response Center, Federal Trade Commission, Washington, DC 20580, call (877) FTC-HELP (382-4357), or check out these publications at www.ftc.gov on the FTC's Internet site.

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Last Updated 09/10/1999 communications@fdic.gov