Dollars & Sense
Do You Know Your Credit Score?
Do you know your credit score?
Having a good credit score means you get the best interest rates on all sorts of loans including your mortgage, home equity loan, car loan and credit card debt.
The most common credit score used is your FICO score. The score ranges from 300 to 850 and it's basically a number that summarizes all the activity on your credit report. Generally speaking, a score in the mid 700s or higher is considered good. If it's lower than that, it's time to give it a boost.
A Little Background
Founded in 1956 by engineer Bill Fair and mathematician Earl Isaac, Fair Isaac Corporation (NYSE: FIC) provides consulting services and decision management systems. They developed the FICO scores, a measure of credit risk, that are the most used credit scores in the world.
FICO scores are available through all of the major consumer reporting agencies in the United States and Canada: Equifax, Experian and TransUnion. (FICO is a registered trademark of Fair Isaac Corporation).
Fair Isaac's current corporate headquarters are located in Minneapolis, Minnesota, USA and the company employs about 3000 people (2006). Source: Wikipedia
Just as a resume displays your work experience to a potential employer, a credit report provides creditors, and in some cases employers and insurers, with a detailed picture of your credit history. And like a resume, your credit report can influence whether you'll get what you're applying for.
A Good Credit Score Can Determine:
- Whether you'll be approved for credit for mortgages, car loans, installment loans, and credit cards,
- The interest rate you'll receive on those loans,
- The cost of your homeowners and car insurance, in some cases, whether you get that job you applied for.
Your credit report provides a snapshot of your credit history and helps lenders make a quick, objective and accurate assessment of your credit risk.
How the FICO credit score is calculated.
The best way to ensure a good FICO credit score is to manage your credit responsibly over time. To maximize your score, it's important to understand what goes into the calculation and how much each factor is weighted:
Types of Credit In Use -10%
Includes the number of credit accounts and the mix of credit types: credit cards, installment loans, mortgages, etc. This is very important if you don't have a very long credit history.
Payment History - 35% This includes:
Many different types of payments, including mortgages, major credit cards, department store credit cards, car loans, other installment loans such as for furniture, etc.
Information from public records, such as:
- bankruptcies
- liens
- lawsuits
- foreclosures
- judgments
-wage garnishments
It also includes details of any missed or late payments, such as the amount, how long ago it occurred, how late it was.
Amounts Owed - 30% This includes:
- the total of all the amounts you owe for all accounts,
- the mix of amounts owed (credit cards versus installment loans)
- the number of accounts that have balances
- how much of your total credit available on credit cards and installment loans you're using (the closer you are to maxing out your available credit, the more negative the impact on your score)
- how much of the original balance borrowed you still owe on installment loans, like your car loan.
Length of credit history - 15%--
As long as you don't have negative information in your file, the longer your credit history, the higher your score.
New Credit - 10% This includes:
- How many new credit accounts you've opened recently
- How long it's been since you opened a new credit account
- how many requests you've made for credit recently
- How long its been since lenders have requested credit information on you
- How good your recent credit history has been
Length of Credit History:- 15%
As long as you don't have negative information in your file, the longer your credit history, the higher your score.
New credit: - 10% This Includes:
- How many new credit accounts you've opened recently
- How long it's been since you opened a new credit account
- How many requests you've made for credit recently
- How long its been since lenders have requested credit information on you
- How good your recent credit history has been
How To Improve a FICO Credit Score
Armed with information about what goes into the calculation of your credit score, you can develop your own plan for improving your score. Some of the best ways to do this include:
*Order a copy of your credit report. Review it carefully. Correct any significant errors
*Pay your bills on time
*Don't open a lot of new accounts over a short time period, especially if you have a short credit history.
*Shop for credit over a short period of time. FICO scores distinguish between searching for credit for a specific loan and searching for lots of different credit lines.
*If you have a questionable credit history, open a few new credit accounts, use them responsibly, and pay them off on time.
*Don't open credit accounts you don't intend to use. A credit card or installment loan can raise your score as long as you don't have too high a balance and you pay it off in a timely manner.
*Keep your balance low in relation to your available credit. If your credit limit is $10,000, keeping your balance below $2,500 (25%) will improve your score.
*Pay off credit card debt rather than move it around to lower rate cards. Moving balances to other credit cards and closing out the old account can hurt your score because it can change the ratio of your total credit card balances to your total available credit lines.
Remember, negative items affect your credit score much more quickly than positive items. Late payments can negatively affect your score in just a few months, whereas paying bills on time may take 6 to 12 months to generate a significant improvement in your score.
An Accurate Credit Report
Occasionally, however, there are errors on these reports that can adversely affect your ability to get a loan or credit. Therefore, it stands to reason that you want to make sure your report is an accurate, up-to-date reflection of your credit history. Here are five reasons why you should become a history buff when it comes to regularly reviewing your credit report.
-Identity theft
-Inaccuracies and mixed files
-Inquiries
About inquiries: Every time you apply for credit and the credit grantor checks your report, a credit inquiry is placed in your file. Too many credit inquiries can indicate possible financial trouble.
For this reason, too many inquiries can actually make getting credit more difficult.
Credit Bureaus
There are three major bureaus that gather your credit information, and each bureau will have different information since they don't share data. When determining your ability to pay back a loan, most lenders examine all three credit reports.
Equifax 888-202-4025
Experian 888-397-3742
Trans Union 800-888-4213
Requesting a credit report
Some experts recommend regularly reviewing your credit report from each of the three major credit bureaus and correcting erroneous information. this is particularly useful before making a large purchase, such as a car or house.
Requesting a report from the three major credit bureaus, known as a full three bureau report or 3-in-1 credit report, is fairly simple. The service is provided by the bureaus themselves along with banks and numerous online agencies. Simply contact one of the bureaus, your bank or do an online search using the key words "credit report."
There are services that will frequently, even daily, monitor your credit report for possible signs of fraud or theft as well. These services alert you to changes in your credit file that may indicate identity theft. The services are fee-based, but the convenience may be worth the price.
Federal Trade Commission publication
"ID Theft: When Bad Things Happen to Your Good Name"