You and your credit (2 of 4) – Credit score fundamentals
Continued from You and your credit (1 of 4) – Why credit is important
Most U.S. consumer credit information is collected and kept by three national credit reporting agencies: Experian (which was the old TRW), Equifax, TransUnion. There is a fourth (Innovis), but they’re not a major player.
These bureaus maintain independent records of your credit history and activity depending on which of your creditors report to them. When applying for a loan, mortgage, credit, or similar, an agent used to have to look at your credit report and make a prediction of your likelihood of repayment. This would determine whether you got the loan/credit or not, and at what interest rate.
More and more, creditors are reliant on the FICO (Fair Isaac Corporation) score, which has become the major determinant of your overall perceived credit worthiness. Scores range from 300 to 850 (a bit different for each bureau) and the procedure for calculating the exact score varies somewhat from one to the other. The other factor that makes your scores vary bureau to bureau is that not all creditors submit your records to all three.
Your score is a snapshot of your credit history and is only good at the time it’s pulled. Because it’s based on the information in your report which can change day to day (even hour to hour), your score is not stagnant. Fluctuations (sometimes major) have been seen overnight, based on new information obtained by the bureau from which it’s pulled.
You don’t always need your scores to be maxed all the time – really only when you’re looking for credit (credit card, loan, mortgage, etc). However, it’s much easier to maintain a solid credit score than to rebuild after having it drop. Also, you don’t know when something is going to come up and you might not have six months boost your credit scores for something important.
To get you started, here are the items that play into how your FICO score is determined:
- 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
- 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
- 15% — length of credit history
- 10% — types of credit used (installment, revolving, consumer finance)
- 10% — recent search for credit and/or amount of credit obtained recently
Because these are all elements of your credit report, obtaining (on a regular basis) and understanding your credit report is crucial. You can pull your credit from all three bureaus annually for free per the Fair and Accurate Credit Transactions Act of 2003. You can pull one at a time or all three. For a small fee, you can also get a snapshot of your score as well. This is easy to do online at annualcreditreport.com, but you can also call 1-877-322-8228 or download the PDF file.
There are also special factors which can weigh on your credit score. In the next part, we’ll discuss those and what can been done to ensure your report will provide you with the best possible score so you’ll be ready when it counts.
Continued on You and your credit (3 of 4) – The major factors influencing score
