Credit Score Basics

At one time or another, we have all been concerned about our “credit.”  For years the credit report was used as a report card for lenders to determine if you had paid your bills on time and would likely repay them in the future.  The credit report is a seven year history of what you have borrowed and how you have repaid … a reflection of your financial history. Although the report contains factual information, reading a credit report is subjective, meaning … different lenders or credit granters look for different criteria and they do not always see the information the same way.

Now there are credit scores, used to help creditors evaluate your ability to repay loans and determine risk factors. 

How does it work?   Information about you and your credit experiences, such as your bill-paying history, the number and type of accounts you have, late payments, collection actions, outstanding debt, and the age of your accounts, is collected from your credit application and your credit report.  Using a statistical program, creditors compare this information to the credit performance of consumers with similar profiles and award points for each factor that help predict how creditworthy you are, that is, how likely it is that you will repay a loan and make the payments on time.  The total of all points awarded becomes your credit score.

The scores range from about 400 to 900, with the higher score being more favorable.  All three Credit Bureaus offer credit scores using a formula developed by Fair, Isaac and Company (also know as the FICO score).  Each Credit Bureau gives the score a different name.  At Equifax, the FICO is know as the “Beacon Credit Score,” at TransUnion, it is called “Empirica” and at Experian it goes by "Experian/Fair Isaac Risk Model."  That means you'll probably have three different scores from the three different national credit bureaus.  Many lenders take the middle score when reviewing your credit applications.  

Factors Affecting Your Credit Score 

1) Payment History (35%)  Late payments, collections accounts, judgments, student loan defaults, or any other matters of public record will bring the score down.  The more recent the problem, the more it can lower the score.  A 30 day late payment during the last 12 months can hurt your score more that a bankruptcy that was filed five years ago.

2)  Outstanding Debt (30%)  It looks favorable to have some open accounts, but not so good to max out credit limits on credit cards.  A low balance on two cards is better than a high balance on one card.

3) Length of Credit History (15%)  The longer your accounts have been open the better. 

4)  Inquiries (10%)  Applying for new lines of credit may hurt your score.  Ordering your own credit report doesn't hurt you, and neither do the promotional pre-approved credit card offers.

5)  Types of Credit in Use (10%)   Loans from Finance Companies generally lower your score, especially when there are no other types of credit reported. 

Tips to help you Maintain and Improve your Credit Score

• Pay your bills consistently and on time.
• Check your Credit Report for Errors.
• Keep balances low on credit cards and other revolving credit.
• Maintain only a reasonable amount of unused credit.
• Do not shop excessively for unsecured credit.
• Establish credit and use it wisely.

Because your credit report is an important part of many credit scoring systems, it is very important to make sure it is accurate.  To get copies of your report, contact the three major national credit reporting agencies: 

Experian       (888) 397-3742       www.experian.com

Trans Union  (800) 888-4213       www.tuc.com

Equifax         (800) 685-1111       www.equifax.com