Your Credit Score - Get The Facts

Your credit score is an important indicator of your financial health. It not only affects your ability to buy a home or vehicle but it can also affect your insurance rates, employment opportunities, ability to rent an apartment and the amount you are required to pay to hook up utilities.

Do you know your credit score? If not, you can quickly and easily find out by getting a free annual credit report and requesting your FICO score. Although the annual credit report is free, there is usually a small fee to get your score but it could be well worth it.

Most lenders use the FICO method from the Fair Isaac Corporation when determining your credit-worthiness. These scores range from 300 to 850. Between 600 and 700 is average but the higher the better.

Credit Score

Each of the three major credit reporting agencies, Equifax, TransUnion and Experian all figure these scores slightly different. Equifax uses the BEACON system, TransUnion has the FICO Risk Score system and Experian uses the Experian/Fair Isaac RISK system.

However, each credit reporting agency rates certain factors based on importance. This is the approximate breakdown of how you credit score is calculated.

  • 35% is payment history. Although they are all important, this one carries the most weight. It takes into consideration how many bills have been paid late, whether they have been sent to collections and if you have filed bankruptcy. A recent occurrence of any of these things affects your credit score more severely. As time passes with good credit history, they don’t affect your score as much.
  • 30% is outstanding debt. The more you owe on loans and credit cards, the lower your credit score. With credit cards and other revolving credit accounts, your debt-to-credit ration is a big factor. When it comes to credit cards you should avoid carrying a balance that’s higher than 75% of your available credit. Ideally it should be less than 25%.
  • 15% is based on the length of time you’ve had credit. The longer you’ve had credit the higher you rank in this category since it provides more history.
  • 10% is based on the types of credit you have. Diversity is the key here. You’ll score higher when you have a variety of different types of accounts. These could include mortgages, auto loans, credit cards, lines of credit, student loans and personal loans.
  • 10% is based on new credit. Any time you open a new credit account it negatively affects your credit score for a short time. However, assuming you pay on time and avoid balances too close to the credit limits, these accounts will eventually raise your score.

    Hard inquiries are in this category and temporarily lower your credit whether you get the loan or not. These credit checks are the ones you give lenders permission to do. If you’re shopping for a loan and trying to get the best rates you’ll probably have several of these happen very close together. The credit reporting agencies take this into consideration and if they all happen within a few weeks of each other, they’ll group them together and only penalize you for one inquiry.

    Soft inquires like when credit card companies periodically check your scores or when you request your own scores do not negatively affect it.

The credit reporting agencies take your information and compare it to other consumers with similar histories to determine your final score. Also these scores change each time your credit report changes so you have plenty of opportunities to improve your credit and earn a good credit score. Find out ways to increase your score.

Credit Score

In order for the three credit bureaus to calculate your FICO score, each of the agencies reports will need to contain at least one account that’s been open for a minimum of six months as well as one account that’s been updated within the past six months. This ensures there’s enough history to accurately calculate your score.

Lenders use these FICO scores. Some also factor in your income and how long you’ve been employed at your current job. This is how they determine whether or not you can get a loan and how much you'll pay for that loan by way of your interest rate. The lower your score, the more they view you as a risk and the higher your interest rate will be.

Other factors can also play a part in determining your interest rate such as what type of property or collateral you’ll use to secure the loan, how much of your own money or equity you’ll put in and lender costs just to name a few. However, your FICO score weighs heavily on their decisions.

To get an idea of how your credit score affects your interest rates, monthly payments and overall amount paid during the life of a loan, check out this calculator.

In some states, insurance companies also look at your credit scores. They use them to figure your credit-based insurance score. These companies are also trying to avoid high risk customers. Their reasoning is, the lower your score the more likely you’ll be to file a claim which will cost them money.

Knowing your credit score and regularly checking your credit report will alert you to any fraudulent activity that may occur without your knowledge. Identity theft is on the rise and catching it early is the best defense.

The good thing is, if you’ve made some mistakes in the past, there are many ways to improve your credit. Be sure to check out the section on credit repair services. It contains informative facts about these companies and what you can do to help yourself.

Having a good credit score is important even if you don’t use credit often. It affects far more areas of your life than you might realize. Knowing your score and what you’re dealing with is a major step to ensuring you’ll enjoy a healthy financial life.

From Your Credit Score to Home