Make the Most of Your Credit Score
A credit score is a formula that
is used to predict risk for lenders. To create a credit score, analysts may
use information in credit reports, account histories, or applications. Their
goal is to accurately identify the commonality of your timely paid accounts,
as well as your delinquent accounts. The results of all this computing and
analyzing, is a number that is your credit score.
Lenders use credit scores to help
decide whether to issue a new account or loan, raise the credit limit on an
existing account or even to decide what interest rate to charge on a new or
existing loan. Insurance companies use insurance scores (which are based on
credit information, but calculated somewhat differently) to help them decide
whether to issue new auto or homeowner's policies, what rate to charge for those
policies, and whether to renew existing policies. Some employers use consumer
scores (which are also based on credit information) to help them make hiring
decisions.
There are different types of scores,
though many of them are developed by Fair, Isaac and Company, Inc. These are
commonly referred to as "FICO scores."
It's important to understand that
your credit score is never a single number. It can vary, depending on which of
the three major credit bureaus supplied the credit information used to calculate
it, what kind of loan is being considered, and what formula the individual
lender uses to calculate it. For example, mortgage lenders typically request a
"tri-merge" credit report, which includes credit information and scores from the
three major credit bureaus -- Equifax, Experian and Trans Union. Typically the
credit score from each of those bureaus will vary so the lender will use the score
that falls in the middle of the three when evaluating the loan.
Keep in Mind:
- Your credit score can change frequently as information is updated
in your credit reports.
- Lenders may use different credit scoring formulas customized for
their loan products when calculating your score.
- Credit scores are calculated using the information in your credit
report, even if that information is not correct.
Pull out quote: With a FICO score,
the higher the number, the better the score. For example, a score of 700 is much
better than a score of 600.
What's In A Credit
Score?
According to Fair Isaac Co, there are
five categories of factors that go into your credit:
| Payment History |
35% |
| Amounts You Owe |
30% |
| Length of Credit History |
15% |
| New Credit |
10% |
| Type of Credit In Use |
10% |
The two most important factors
that go into your credit score are your payment history (have you paid
your bills on time?) and the amounts you owe (how much debt do
you carry?).
Together, these categories make up
about two-thirds of your credit score. That means that if you want to improve
your credit score you should focus on paying your bills on time and paying
down debt.
How Can I Get My
Credit Score?
You can typically purchase
a credit score when you order your credit score, either through one of
the major credit bureaus or through an online service that sells credit
reports to consumers. You can also order an Equifax credit report and
score through myFico.com.
It's an excellent idea to
check your credit report and score at least six weeks before a major purchase
such as a home or car, to give yourself time to correct any mistakes or
problems.
