What Is A Credit Score?
A credit score is a three-digit number, typically between 300 to 850, which credit bureaus calculate based on information in your credit report. It is a simple, numeric expression of your credit worthiness. Although the three credit reporting bureaus (Equifax, Experian, and Trans Union), use similar methods to determine a credit score, the formulas they use are not exactly the same and your credit score will vary from bureau to bureau.
Credit scores play an important role in today’s digital economy. The interest rate you get on a home or car loan, for example, is determined by your credit score. Also, when you apply for a credit card or a charge card at a retailer, the answer depends largely on your score, and when you apply for insurance, most insurers will pull a copy of your credit score.
The main factors involved in calculating your credit score are:
- The number of accounts you have;
- The types of accounts;
- Your available credit;
- The length of your credit history;
- Your payment history.
The bureaus do not seek out information about you – information is reported to them. Banks, credit card companies, retailers, and others, report the amount you owe, your total allowable credit, and the payments you make. Late payments obviously count against you. If you have maxed out your credit cards, that counts against you, too.
You are entitled to order your credit report from each agency once every year. You can obtain the reports through annualcreditreport.com.
After you have ordered your free credit report(s) you can also get your credit score (it is not included in your credit report), for a small fee (about $9). If you want to keep track of your credit score on an on-going basis, you can sign up for a credit monitoring service, which will alert you whenever there is a change to your score.
You should check your credit report regularly to make sure there is no inaccurate or erroneous information in it. If you find information that is wrong, you should immediately file a dispute with the credit agency.
Remember, negative information only stays on your credit report for a fixed period of time – approximately seven years – so improving payment habits will increase your score over time.
How is My Credit Score Calculated?
Your credit score is calculated based on a number of factors listed in your credit history that describe components of your financial life including the number and type of credit accounts you have, the amount of available credit, the length of your credit history and your payment history. Each of these factors is assigned a numerical value, and then weighted based on how prominently they affect your credit worthiness.
Each of the credit reporting bureaus analyzes your credit history and weights these factors differently, but they generally follow this breakdown:
Payment history :35%
Amounts owed: 30%
Type of credit used: 15%
New Credit: 10-12%
Length of credit history: 5-7%
How Do My Actions Impact
My Credit Score?
The good news is that no matter where your credit score is today, there are a number of different steps you can take now that can change your credit history and help impact your credit score. You should take all the steps you can to help establish a good credit score.
Obtain your credit history and check for the following:
Are there any factual errors? If there are, you’ll need to dispute them with the credit reporting bureau. (See How Do I Dispute An Error on My Credit History?)
Have I made any late payments? It’s important to pay every bill on time. Even one late payment can affect your credit score for up to two years.
How many credit accounts or “tradelines” do I have? If you have too many different credit accounts, it could negatively affect your credit score.
How many new credit accounts have I opened? Be mindful of opening too many accounts at once. Too many inquiries by prospective creditors in a short period of time may negatively affect your credit score.
How old are my credit accounts? The longer you have had a credit account open and active, the more likely it will help stabilize your credit history and positively impact your credit score.
Do I have enough different types of credit accounts?Ideally, you will have at least four tradelines of different types, such as credit cards, student loans, a mortgage or home equity line of credit or perhaps an auto loan.
Are my balances too high relative to my total available credit limit? Creditors prefer to see a lower ratio of how much debt you’re carrying compared with how much available credit you have on a particular account. Ideally, you’ll use less than 35% of the total credit limit on any particular account. For example, if your credit card has a maximum credit limit of $1,000, carrying a balance above $350 on that card could negatively affect your credit score.
Do I have any judgments, liens, foreclosures, bankruptcies, short sales or delinquencies that have been reported to creditors? Having this sort of information on your credit history is extremely damaging to your credit score. If you have gone through a reversal of fortune, and had to file for bankruptcy or completed a foreclosure, your credit score will reflect this negative information for several years.
The most important thing you can do to positively impact your credit score is to pay every bill on time.
Why Should I Check my Credit History and Credit Score?
In today’s digital economy, your credit history and credit score are vital pieces of information that are key to helping you secure your financial life. Credit card companies, mortgage lenders, and insurance companies will pull copies of your credit report and score in order to decide whether to extend credit or how much to charge for your insurance premium.
Financial services companies tend to group borrowers into segments according to their credit score. These credit score ranges may determine how much you’ll be charged for your insurance coverage or the interest rate you pay on your mortgage, student or car loan or the type of credit card you’ll be offered.
In general, Equifax’s credit score ranges from 280 to 850.
The formula, which is based on the FICO® credit-scoring model, breaks down as follows:
FICO® CREDIT SCORING MODEL
Typically, if your credit score falls in the uppermost range, most lenders and creditors will consider you to be an excellent credit risk, and may extend the best credit offers to you. If your score is in the lowest range, it may be extremely difficult for you to obtain a loan on any terms whatsoever.
You should view your credit score from Equifax to better understand your current credit position. That way, you can decide whether to pursue a credit application now or wait until your credit history and credit score improve.