UNDERSTANDING YOUR
CREDIT SCORE
In
today's world, your credit score is one of the most important issues to
understand and be aware of. Most lenders,
no matter what you are buying make their decisions based on your credit score,
but more importantly, your credit score in many cases will determine the
interest rate you are charged. I have
researched credit scores and am pleased to bring to you the results of my
findings combined with years of experience.
SO
WHAT IS A CREDIT SCORE EXACTLY?
It
is the number that creditors use to help them decide whether to extend credit
to you and also what rate of interest to charge you. In most cases, the lower the credit score,
the higher the risk. There are numerous
types of credit scores, but the most prevalent is the credit bureau score. The credit bureau score is based solely on
the information contained in your consumer credit reports. Most credit scores are based on calculations
by Fair, Isaac and Company. Over time, they developed the scoring model
that is most widely used. If you hear
the term FICO score, this refers to Fair, Isaac and Company.
WHAT
DOES MY CREDIT SCORE DO FOR ME?
It
gives lenders a quick and easy way to determine your probability of
repayment. Before credit scoring, the
task of obtaining a loan was slow and cumbersome and frankly relied on the
person's judgment that was making the decision.
Since credit scores have become widely used, loan processing has become
quicker, fairer, and has had an effect on lowering rates. Not all lenders however, base credit
decisions solely on your FICO score.
Many, like Ford Motor Credit, consider other criteria like job time,
residence time, down payment and other factors to determine whether or not to
extend credit.
SO
WHAT IS A GOOD SCORE TO HAVE?
I
have seen scores range from the low 400's to well past 800. Again, the higher the
score, the better the credit rating.
Most lenders use a break of somewhere around 620 as the determining
factor of a regular loan versus what is called a "sub prime" or
high-risk loan. Some lenders will not
extend credit to people with under 620 credit scores and other lenders will do
those loans, but at a higher interest rate.
A few lenders do automatic approvals for people with 750 or higher
scores with no questions asked.
ISN'T
THERE SEVERAL DIFFERENT CREDIT BUREAU AGENCIES?
Yes,
there are three primary credit bureau companies. There is Equifax, Experian,
and TransUnion and each of them refer to their credit
scores by different names. At Equifax
for instance, their score is called the BEACON score. At Experian, it is
the Experian/FICO score and at TransUnion,
it is called EMPIRICA.
HOW
DO I FIND OUT WHAT MY SCORE IS?
You
can purchase your FICO score right over the Internet at either www.myfico.com
or at www.equifax.com. Besides your FICO
score, you will get your entire credit report, details on how to read your
report and ways to raise your scores.
WHAT
MAKES UP MY FICO SCORE?
Generally,
there are five criteria that make up the score.
The biggest driver is payment history...how you have paid your
bills. This accounts for 35% of your
score. 30% of your score is based on the
amount of money you owe lenders. The
length of your credit history makes up 15%, new credit makes up 10% of your
score and finally the remaining 10% is the types of credit you use. Things that have NO effect on your score
is: race, religion, sex or marital
status, your age, length of employment, job description, where you live or any
items reported as child or family support.
Also, unless it is on your credit bureau, it is not taken into account
to arrive at your score.
HOW
CAN I RAISE MY SCORE?
Paying
your bills on time will help dramatically since we know that credit history is
the biggest contributor or detractor to scores.
Keep your balances low on credit cards.
Do not apply for credit unless it is absolutely necessary. And be sure your credit report is
accurate...many mistakes are found and must be corrected to immediately impact
your score. By law, all three
credit-reporting agencies must respond and report back to you within 30 days if
you challenge any information on your credit report.
WHAT
Here
is a break down of where most American's currently score:
§ Less than 1%
have scores under 500
§ 5% have scores
of 500 to 549
§ 7% have scores
of 550 to 599
§ 11% have scores
of 600 to 649
§ 16% have scores
of 650 to 699
§ 20% have scores
of 700 to 749
§ 29% have scores
of 750 to 799
§ 11% have scores
of 800 or more
Other
interesting statistics:
§ The average
consumer has 11 credit obligations on their report
§ Fewer than 4 out
of 10 consumers have ever been more than 30 days late on a payment
§ 2 out of 10 have
never been more than 60 days delinquent
§ Less than 10%
have had an account closed due to default
§ 48% of credit
card holders owe less than $1000 on their cards
§ The typical
consumer has access to over $12000 in credit, but over 50% of them use less
than 30% of what is available
HOW
LONG DOES INFORMATION STAY ON MY CREDIT REPORT?
Good
or bad, it is with you for seven years unless it can be proven that it was a
mistake.
WHAT
IS AN INQUIRY?
This
is the record of any person who has checked your credit report. This is another good reason to check your
credit report yearly. A lot of inquiries
will lower your FICO score because it shows you are applying for new credit, however inquiries will not drastically change your
score. If you have inquiries from
mortgage lenders or automobile dealers in a short period of time, this will not
affect your score. Their systems
consider this as one inquiry and recognize that you are shopping for a specific
product.
WHAT IF I AM DENIED CREDIT?
If you are turned down for
credit, the lender must notify you in writing within 30 days the reason you
were turned down. At this point, you
have 60 days to request a free credit report from any of the credit reporting
agencies. The Equal Credit
RESOURCES:
To get a copy of your credit
reports, here are the contact numbers,
Ø Equifax
Ø Experian
Ø TransUnion
To just find out what your
FICO score is, go to
http://www.equifax.com
or www.myfico.com/
To read the Federal Trade
Commission rules on the Equal Credit
http://www.ftc.gov/bcp/conline/pubs/credit/ecoa.htm