How to Improve Your Credit Score?
Before you can start improving your credit score, you need to understand how credit scoring works. 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 credit 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.
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.
How is a Credit Score Calculated?
According to Fair Isaac Co, there are five main factors that go into your credit score:
|Amounts You Owe||30%|
|Length of Credit History||15%|
|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 report, 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. For more information on how to improve your credit score, download Make the Most of Your Credit Score.