Everything You Need to Know About Credit Scores
Obtaining credit today is a lot tougher than it used to be. You need a good score to be approved for a mortgage or any other type of loan. However, many people don’t know if their credit score is good or bad. But everyone has a right to check their credit reports for free, one-time a year. However, you’ll pay a small fee for your credit score – usually less than $10 for one score or $30 for all three.
Even if you get your credit score, you still have to know what it means. So let’s review how credit reporting and scoring works.
Experian, Equifax and Transunion all gather credit data and create a score based on your credit profile. Typically, these scores are roughly the same, but at times they can differ greatly. This is due to the fact that not all creditors report to all agencies. If you have a collection or late payment showing on one report, but not another the scores will vary.
Most lenders – 90% of the major financial institutions – use the FICO score as a credit decision tool. This score ranges from 300 to 850.
A company called FICO (Fair Isaac Corporation) provides the proprietary software that all three three credit-reporting agencies use to calculate scores.
The score is made up of five different elements.
- Payment History: How often you pay late or on time.
- Amounts Owed or Credit Utilization: How much of you available credit you actually use. This is expressed as a ratio or percent.
- Length of Credit History: How long you’ve been using credit.
- New Credit: If you’ve recently applied for and received credit.
- Types of Credit Used: What kinds of loans you have.
Each of these factors is weighted, meaning it has a greater or lesser impact on your credit score. Payment history affects your score the most – 35 percent. Credit utilization is next, accounting for 30% of the score. Length of credit history accounts for 15%, while new credit and types of credit used make up 10% each.
What the Credit Score Doesn’t Include
- Personal Characteristics: Race, color, religion, national origin, sex, marital status, or age.
- Employment Characteristics: Salary, occupation, title, employer, date employed or employment history.
- Interest Rates: The rates on your loans or credit cards are not disclosed.
- “Soft” inquiries: Personal requests for your credit report by you to check your report. Also, requests by lenders seeing if they can pre-approve you for a credit offer or to review your account after lending to you. Employment background checks are also not included in the report.
- Credit counseling: The report does not disclose your participation in a credit-counseling program.
Checking Your Score
You will need to find a credit bureau to run a credit score inquiry, or more commonly known as a credit check. You can use a free service like www.annualcreditreport.com or www.freecreditreport.com to get a free report from each bureau every 12 months.
Even after running a credit check, simply getting your score is not enough. You will also need to know how to interpret if your score is good or bad?
Excellent to Good Credit Scores
The top credit scores are above 750 and this will qualify you to get just about any type of loan, but lenders will still look at your other financial information before making a decision. This can include assets you own, income from your job, bank accounts, and home-ownership.
If your score exceeds 680, you’ll still be in pretty good shape as long as the other parts of your financial profile are in order. This includes adequate income to cover any loan payments, savings, and stable employment.
Average to Bad Credit Scores
If your score dips below 680, credit can become much harder to come by. This is particularly true if you drop below 660. You may still qualify, but your interest rate will start to rise. Higher-interest loans are sometimes called sub-prime rates. The higher-interest rate is due to the increased risk the lender is taking.
A decline below 600 and you may not receive credit unless you go to an alternative lender. These types of lenders use other methods besides the credit score for determining your creditworthiness, including your paycheck and work history. They may also require a bank account.
Fixing an Inaccurate Score
If your score is low, always check your credit report for inaccuracies. Most issues occur due to errors caused by the use of different but similar names, clerical errors leading to misreported payments, and incorrect entry of Social Security numbers.
If you notice anything that is incorrect follow the credit bureaus formal dispute process. This should be outlined in the report and can usually be done online. It takes around 30 to 60 days to get most inaccuracies cleared up. If the creditor disagrees with your dispute, it can take longer, as you will have to provide documentation supporting your claim.