What is edit Score?
I'm glad you asked. Your Credit Score is a number which indicates in one simple 3-digit statement how reliably you will repay any loans extended to you on time. It is a calculation based on a formula owned by the Fair Isaac Corporation (FICO) and they charge credit bureaus a royalty for each use of that calculated number. The number ranges from 300 to 850. The higher the score is, the more likely it is that you will be given the loan and the better interest rate that will be offered. Each of the credit reporting bureaus pulls their information for a slightly different group of lenders and so they will each have a slightly different score, sometimes as divergent as 50 points.
The Reader's Digest chart displays the scoring as something like this:
- SCORE RATE
- 760+ 4.981%
- 700-759 5.203%
- 680-699 5.380%
- 660-679 5.594%
- 640-659 6.024%
- 620-639 6.570%
- Below 620 It will be tough to get a loan at all.
You are entitled to one free credit report each year. You can get your scores, based on your TransUnion and Equifax credit reports through myfico.com for $15.95 each. The third agency, Experian, no longer sells its FICO scores to non-businesses.
How is Your FICO Score Calculated?
The score is designed to show how well you've managed your debt. Bad choices such as late payments stay on your record for seven years, some types of bankruptcy stay for 10 years.
Some credit-type factors don't affect your score such as employment status, income, debit card habits, savings, bounced checks, overdraft fees, utility bills and late rent . . . if they have not gone to court.
35%: Payment History
The bureaus use when you last paid an account late, how often you pay late and by how many days. To make this work for you set up automatic payments to guarantee that you are never late. One skipped or late credit card payment could drop your score 100 points which could cost you big time on the percentages above. To improve your score pay your bills on time, every time and you will improve your score within months.
30%: Total Debt
Higher debt loads work generally against the consumer (you). To make this work for you watch your "usage ratio" - the percentage of credit that you have used up on your cards. To keep this percentage low, don't max out your cards and don't cancel credit cards.
As an example, you have five cards with a total credit limit of $5000. Spread across these five cards, you owe $500. Your usage ratio or percentage is 10% (500/5000). Now, suppose that you consolidated all $500 onto one card and canceled the other four. This card has a limit of $1000. Your usage ratio is now 50% (500/1000), and that is enough to lower your FICO score.
To improve your score, according to the article, the people with the best scores tend to use no more than 9% of their available credit limit. They also never go above 50% of available credit because that affects the score in a big way.
15%: Duration
The longer that you have had an account, the better. A hit on a newer account will hurt your score more than the same late payment would on an older account. To make this work for you avoid opening new accounts that are not needed. Keep your oldest accounts active so that they don't get closed by the lender. To improve your score and keep the account open, set up an automatic payment each month from your oldest accounts and pay them in full every month.
10%: New Credit
Multiple credit requests imply that you are a greater credit risk. The FICO formula takes into account the number of new accounts opened and the number of requests/inquiries for your credit score or report. To make this work for you to squeeze your applications for loans (mortgage, car, school, etc.) into the same 45-day period so that FICO will consider them one request. Banks and insurance companies routinely check credit reports on their clients. if your credit score has dropped they may possibly raise your interest rate, lower your credit limit (or both) or cancel your card. Beginning 2/22/2010, companies will no longer be able to raise your rates on old balances if you have a fixed rate card.
Some requests do not count agains your credit score. These include making a request for your own credit report, and those "preapproved credit" offers.
To improve your score don't apply for new credit if not needed since the inquiry will hit your score. If you do need to apply for credit, do all of the requests within 45 days so that they are viewed as a single request.
10%: Types of Credit
The FICO formula looks at the number of each type of account as well as the "quality" of each type of account. For example, a major banking card carries more weight than a department store card. To make this work for you realize that revolving accounts (credit cards) carry more weight than installment loans (mortgage, car, student loans) because they tend to better predict debt management abilities and control. If your "mix" of debt seems off balance to the FICO formula it can cost you points on your score. You can have too many cards (4 or 5 is probably okay) and not enough other types of loans. Again, how long the accounts have been open plays a role here as well. To improve your score be aware of the types and numbers of accounts that you have open with thoughtfulness regarding what types of credit that you need to stay balanced.
Can You Improve Your Score?
If you've made mistakes, get back on track quickly. The faster you clean up your situation, the sooner your score begins to improve. In today's tightened credit economy, you will need better scores to get the credit benefits that you used to get more easily.
Don't get fooled by the "free" reports that aren't
Check all three of your credit reports annually. Do not check them all at once. Check one every four months so that you can see trends happening to your credit more readily.
Check your reports for free at annualcreditreport.com. Don't fall for those commercials and ads for other free sites. You get three for free (one from each reporting bureau) every year without charge.
Check your reports for errors
Check for accounts that you don't recognize that do not belong to you.
Check for addresses where you have never lived.
Check birth date and SSN.
Check inaccurate reporting of delinquencies.
Watch for stolen identities or cross reporting with someone of a similar name.
Report any errors found
One study found, according to Reader's Digest, that 79% of all credit reports had mistakes. One in four had mistakes that could cause a lower score to be calculated. Report errors to the appropriate credit bureau. It has 30 days to investigate and respond.
Don't get flipped
Sometimes figures get flipped in error such as reporting that you owe what your limit is and that your limit is what you owe, which would impact the credit score dramatically. If this happens, write to the credit reporting company and to the creditor that provided the information providing the details of the inaccuracies.
Time your report requests
Since you don't really have a permanent report, but rather a report which continues to change as lenders report information, if a business asks for your report the day before you have paid all of your bills, it will be different a few days later. You acn request a "rapid rescore" but it will cost you $30-$90 per reporting agency.
DIY
You don't need to hire (and pay) experts to fix your credit score. You don't need credit monitoring services. You don't need dispute mills to argue every black mark on your report.
Some items will disappear (for awhile) because a lender did not respond to a letter within 30 days. But if it really belongs on your report it will reappear on your report in a month when the lender again reports your status. The best strategy to get your score up: Change your financial habits sot hat your score will go up and stay up.
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