A credit score is a number that is put through a scientific algorithm that summarizes your credit risk based on a snapshot of your credit report at any given moment. It is a number that has grown to define us financially, and everyone uses it these days from landlords, to utility companies, insurance companies, to lenders, it seems everyone wants to know where we stand on this report card. Since this number is so important, I wanted to share the facts.
Credit reports contain your credit history that is reported to credit reporting agencies to the lenders that have loaned you money. This report lists what kind of credit is extended, how long accounts have been open, and if you’ve paid your bills on time. It gives lenders and idea what credit you’ve used, and what new credit you’ve been seeking. Credit reports however do not contain information such as employment history, or income.
There are three bureaus that maintain credit reports. They are TransUnion, Equifax, and Experian. When you apply for credit, the creditor will request a copy of your credit report from at least one of these three bureaus. The creditor will then evaluate the credit report, credit score, and other information that your may have provided to furnish a credit decision. If you’re approved, the new credit, or “tradeline” will be included in your credit report, and updated approximately every 30 days.
About 90% of lenders use what is called your FICO credit score. A FICO score was created by the Fair Isaac Corporation, and these scores are calculated solely on information provided in your consumer credit report. You have a FICO score for each of the three bureaus, and your score may differ by 50 points, depending upon recent credit activity. Each lender has its own strategy for grading credit scores, but all credit scores consist of the same five key ingredients, credit history, credit mix, length of time credit has been open, new credit, and amount owed. Typically, your score is broken down to be around 35% of your score is your payment history, 30% is amount owed on your tradelines, 15% is length of credit history, 10% is your credit mix (credit cards, retail accounts, installment loans, finance accounts, mortgage, etc.) and 10% is your new credit. Your FICO score can range anywhere from 300-850, the higher the score, the better you look to lenders.
With access to so many different credit scores, it is hard to know which score we should go by. I have found several of these websites advertising to give you your credit score, but many times they are “educational” credit scores. These are not necessarily wrong scores. They point you in the right direction, but likely are not the scores that your lender is using. Donna, from Las Vegas said on www.myfico.com “I requested my credit score on www.transunion.com my credit score was a 689. When I pulled my credit score on www.myfico.com, all three bureaus were showing me at 733.” A writer for the Washington Post, Caroline Mayer, says “ www.creditkarma.com showed my credit score 150 points higher than www.myfico.com .” The best way to get your most accurate score is to ask your lender where they are getting your credit score. Likely, they are using your FICO score, however not all lenders do. You may access your FICO scores from Equifax, and TransUnion at www.myfico.com for a small fee; however Experian does not sell their credit score to consumers. Some credit card companies provide access to your FICO credit score just for being a member, Barclaycard, First National Bank and Discover just to name a few. Remember too, timing may also impact the difference in score. If you have just paid down a balance, or opened a new line, the information may not be the most accurate, therefore creating a discrepancy. It’s important to remember, your credit score is a snapshot of your credit report at that exact moment in time.
So what do you do when your credit is a little less than perfect? There’s no number that lenders say you have to be at, but people with higher credit scores tend to get better interest rates, and are less likely to be declined for an extension for credit. Steve Bucci of MMI Financial Education Foundation, a credit counseling firm says, “No more than 50% usage ratio.” This means, on your revolving lines such as credit cards or lines of credit, do not go above half of your credit limit. Going over 50% usage ration makes your credit score nosedive. Also, a black mark such as a late payment stays on your credit report for seven years, bankruptcy stays on for ten. When you are thinking of applying for a credit card, remember, one from a national bank carries a little more weight than one from a department store, which can be good, or bad. If you rack up huge debt and take a long time to pay it down, you want the department store card. If you are staying under your 50% usage ratio, and not making late payments, go for the credit card from the national bank. Of course no one can foresee forgetting a payment, it happens to us all. If your credit is a little lower than where you would like to see it, set your goals small, and work up from there. Start with minimum payments, and work up to paying off the tradelines with the highest interest first. Keep your tradelines with zero balances open to boost your usage ratio, make regular on time payments, payoff those debts with time, and see those credit scores rise.
With your credit being such an important part of your financial future, you want to make sure you are checking your credit report for mistakes, and report any errors you may find. www.annualcreditreport.com gives consumers access to 1 credit report per year from each of the three bureaus. My tip is to pull on bureau every four months. This way, you may monitor your credit more frequently and potentially spot any errors or fraud. New York City Consumer Advocate Matthew Sheldon says his score dropped from 730 to 620 before he realize there was a mistake on his credit report. He wrote the consumer reporting agencies, as well as the creditor providing the improperly reported numbers, detailing the accuracy. The problem and his credit score were fixed quickly and professionally.
Tips from the credit bureaus to boost your score include pay bills on time, pay off debt, keep balances low, don’t close unused cards, use your full name on credit applications, correct any inaccuracies you may find, apply for and open new tradelines only when necessary, and review your credit report three months before any big purchase. It’s difficult but not impossible to build your credit. It takes dedication and a little knowledge. Hopefully these tips will point you in the right direction, no matter what end of the credit spectrum you are on.