So what’s the deal with a [tag]credit score[/tag]? What does it mean? How is it determined? How does it affect you? Everywhere I go there are commercials talking about [tag]credit[/tag] scores. Most people know that the higher your credit score the better interest rates you can get on credit cards, car loans, and mortgages. If you want a general overview of credit score check out [tag]myFICO[/tag].
What most people don’t know is how their score is determined and how to raise their score.
The credit score, also known as a [tag]FICO[/tag] score, is a three digit number used by all 3 credit reporting bureaus – [tag]Experian[/tag], [tag]Trans Union[/tag] and [tag]Equifax[/tag]. Credit scores generally range from 300 to around 900 (although I don’t think there are official limits.)
This number is determined from a number of factors which are a closely guarded secret held by Fair Issac and Co. Since I’m no expert in credit scores I’ll rely on HowStuffWorks explanation:
- 35% of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.
- 30% of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits.
- 15% of the score is based on the length of time you’ve had credit. The longer you’ve had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.
- 10% of the score is based on the number of inquiries on your report. If you’ve applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven’t used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year.
- 10% of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn’t have. These actually come more into play if there isn’t as much other information on your credit report on which to base the score.
Now taking what we know about how credit scores are determined, let’s look at some ways to improve your score:
- A rather simple one is to pay your bills on time
- Keep your credit card balances low (maxed out cards kill your score)
- Don’t open credit accounts that you don’t need (lots of available credit can actually hurt your score)
- Make sure that your credit report is accurate
- Don’t use your credit card for everyday spending – even if you pay it off every month (This can make you look like you are in more debt than you really are)
Now, thanks to the [tag]Fair Credit Reporting Act[/tag] you can get a free credit report once every 12 months at AnnualCreditReport.com.
A few other things to think about are credit repair, identity theft protection or checking your FICO score. (affiliate links)
Like I said before, I’m no expert on this one. I’m just telling what I know. If you have any suggestions, tips or corrections leave me a comment below!
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This is some great advice. I’m going to have to look into it when I do my own finances.
Thank You