Your Credit Score. What’s in that number?
Your credit score is a three-digit number that affects almost every aspect of your life. It is the product of a complex equation that takes into account all of the information contained in your credit history. Different countries have different versions of the credit score. In the US, the most common scoring system is Fair Isaac's FICO model.
While the FICO formula is secret, what goes into it is not. The most important thing is your payment history. It contributes to approximately 35% of the score. This includes the number of credit accounts you have, any past-due items, bankruptcies, court judgements, lawsuits, etc. If you miss a payment or default on a loan, it will lower your credit score. Making regular monthly payments raises it.
Another 30% of the score reflects the total amount you owe and the proportion of credit lines you use. If all of your credit cards are maxed out, your score will suffer. Ideally, you shouldn’t use more than 35% of your credit limit.
Other factors taken into account include the length of your credit history, the number of recent credit inquires and new accounts, and the types of credit used.
Video: Understanding Your Credit Score (Bloomberg)
How your credit score affects your life
If you want to take out a loan, the first thing that the bank will do is run a credit check. If you apply for a credit card, the card company does a credit check. If you want to get a new cell phone, the provider will run a credit check. If you’re applying for a job, the employer may – you guessed it – run a credit check.
Lenders use your FICO score in deciding whether or not to lend you the money. They also use the score to determine the interest rate on the loan. People with a low credit score are considered to be high-risk borrowers. Lenders want extra compensation for taking on extra risk.
Beware of companies that claim they can improve your score
There are many companies that promise to dramatically improve your score overnight. Do not believe them. If it sounds too good to be true, it is. The only way to instantaneously improve your score is to remove all of the negative information from your credit report. This just isn’t possible. That information will stay on your report for at least seven years, longer if it’s a bankruptcy. There’s nothing that these companies can do to change that. The best they can do is check the report for errors. You can easily do this yourself.
How to improve your credit score
There are a few simple things you can do to improve your credit score:
> Get copies of all three of your credit reports once a year. Credit bureaus are required to send them to you free of charge.
> Check for errors. It may be something small, like duplicate information, or something big, like identity fraud. The sooner you know, the sooner you can correct the error.
> Always pay your bills on time. Missing even a single payment will hurt your score.
> Do not apply for too many new accounts in a short period of time.
> If you don’t have much of a credit history, apply for a credit card, or even a store card.
> Don’t max out your credit limits.
> Don’t cancel all of your credit cards in one go. If you’ve paid off the balance, put it away and don’t use it.
These are all things you can do on your own, without having to pay someone to do it.
What to do if you find an error on your credit report
Video: How to Monitor and Correct Your Credit Report
If you have an error on your credit report, it can lower your score through no fault of your own. You will need to contact the credit bureau, either by mail or via their website, and file a dispute. Fill in the necessary form and include any proof you have to back up your claim. If you’re not successful, you should contact the creditor directly asking them to remove the erroneous information.
You can get copies of your credit reports by contacting the following agencies:
TransUnion
P.O. Box 390
Springfield, PA 19064-0390
800-916-8800
www.transunion.com
Experian
P.O. Box 2104
Allen, TX 75013-2104
888-397-3742
www.experian.com
Equifax
P.O. Box 105783
Atlanta, GA 30348
800-685-1111
www.equifax.com