How Your Credit Score is Derived
A credit score is a numerical calculation that is based on your financial behavior as reported on your credit report. Virtually all lenders look at your score to determine if you responsibly manage your credit obligations. The most commonly used credit score is a FICO® score, with scores ranging from a low of 300 to a high of 850. Your FICO score is determined by the following criteria:
Payment history – includes the number of accounts paid on time, number of accounts past due (and by how long), accounts in collection, charge-offs, and bankruptcies.
Amounts owed – includes the amount owed, number of accounts with balances, and outstanding balances in proportion to total credit lines.
Length of credit history – means the length of time accounts have been opened.
New credit – refers to the number of accounts recently opened, including number of new credit inquiries.
Types of credit used – refers to the types of "mixed" credit reflected on your report and includes things like car loans, mortgages, credit cards, etc.
There are three major credit bureaus – Equifax, Experian, and TransUnion. All three bureaus maintain credit scores on borrowers; however, there may be some variation in the calculation of the credit score as well as the information shown on the report because not all creditors report to each bureau.
The Benefits of Good Credit
Good credit means you’re more likely to get approved when you apply for credit. Beyond that, though, there are additional benefits you might enjoy:
- “Cheaper” loans – because many lenders charge lower interest rates to borrowers with higher credit scores.
- Easier time renting an apartment – due to the fact that some landlords pull your credit report to determine if they want you to be their tenant.
- Better chance of getting a job offer – because employers may check credit ratings, so it’s important to keep your credit report accurate and your score as high as possible.
- Opportunity to take advantage of deals – because some companies will only offer credit to those with good credit scores.
Look for Errors On Your Credit Report
Errors could include things like:
- mixing you up with someone else due to a similar name or Social Security number
- outdated or incorrect information
- updates not made after a credit issue was resolved
- showing a credit account that you did not open
If there are errors on your report, you will want to get them corrected. The Federal Trade Commission provides guidance on how to correct inaccurate information. Review their article entitled, Credit Repair: How to Help Yourself.
What Improves Your Score?
- paying bills on time
- having a small outstanding balance in proportion to total credit lines
- having a reasonable number of credit cards (as opposed to a dozen!)
What Hurts Your Score?
- missing payments or failing to pay at least the minimum amount due
- having delinquent student (or other) loans
- "maxing out" your credit cards
- having too short of a credit history
- declaring bankruptcy
Review www.myfico.com for information on repairing and improving your credit score.
Get a Copy of Your Report
The Fair Credit Reporting Act requires each of the three major credit bureaus to provide you with a free copy of your credit report once a year. Get your free report at www.annualcreditreport.com. Your credit score will not be affected by this request.