Credit Scores

You have probably heard about credit scores but do you know what is considered a good score and what impacts your score? Do you know what your score is? Did you know that there are three different scores?

Each of the three credit reporting agencies has a different name for the credit score. Experian calls it an Experian/Fair Isaac Risk Score, TransUnion a FICO Risk Score and at Equifax it is called a BEACON Score. It is a good idea to check each of your credit reports and scores periodically to make sure that the information reported is accurate.

Scores range between 300 and 850. Generally anything over 700 a good score (but keep in mind that lenders each have their own criteria for lending).

I have always checked my credit regularly but I was confused about credit scores. I knew that I had decent credit but didn’t understand how my credit score was computed. It was a mysterious number that my mortgage broker seemed very concerned about. So, I did some research at MyFICO.com and found some information on the factors that FICO scores are based upon:

• 35 % of your FICO score is based upon your payment history. If you pay your bills early or on time, you will have a higher score than if you have any late payments.
• 30 % of your FICO score is based upon the amounts you owe. Your score is based upon the amount you owe in relation to the amount of credit that you have available. In other words, if you have 5 credit cards each with a $1000 credit limit and you owe $500 on each of them, you will have a lower debt to available credit ratio than someone who has one credit card with a $3000 limit and owes $2500 on it. A lower debt to available credit ratio is considered better. If you have a high debt to available credit score, you might try asking your credit card issuer to increase your credit limit (just try and keep your balance due under 30% of your available credit). One thing that I was surprised about is that even if you pay your credit cards in full each month, the balance that you owe each month can impact your available credit ratio. One tip that someone else suggested is to pay your balance in full before the next statement cut off date. That way the credit card company will report your balance as zero to the credit reporting bureaus.
• 15 % of your FICO score is based upon the length of your credit history. The longer you have an account, the better as far as your credit score goes. In regards to your score, keeping accounts open rather than closing them will help your score. Using an old card every 6 – 12 months will keep it active in your credit file.
• 10 % of your FICO score is based upon the number of new accounts that you have. A large number of new accounts can impact your score in a negative way. Only apply for credit when you need it to limit the number of new accounts that you open.
• 10 % of your FICO score is based upon the type of credit you have. The number of credit cards, mortgages, car loans, personal lines of credit, etc also plays into your score.

Your credit score does not factor in any of your personal information like your age, sex, race, religion, income, address, or obligations not reported on your credit report.

If your score isn’t as high as you would like it to be, you can work towards a higher score. Scores like good credit take time to build. If you want more information on improving your score, I found that educating yourself at a place like www.myfico.com is a good start.