Signon to Passport
February 2007
An extra 25 points on your credit score can save you $50,760 over the life of a 30-year, $216,000 home loan.
In fact, your credit score influences virtually everything about your financial situation, from the interest you pay on your credit card to the bill you receive for your auto insurance.
So what goes into your credit score? And how can you make sure yours is working for you and not against you? This primer answers those questions and more.
- What is a credit score?
- How often should I check my score?
- What components make up my score?
- How can I improve my score?
- How often should I check my reports?
- What if I find an error?
- How can I learn more?
What is a credit score?
The big three U.S. credit bureaus — Equifax, Experian and TransUnion — use information from public records and creditors to create credit reports outlining seven years of your borrowing history.
Then the bureaus encapsulate those reports into a single number between 300 and 850 points. That's your credit score — aka your FICO score, after the scoring model developed by Fair, Isaac & Co.
Anything above a 620 is considered good.
Your credit scores can range wildly between bureaus. In one study by the Consumer Federation of America and the National Credit Reporting agency, scores varied by an average of 41 points per person.
Creditors often use the median score, not the average, to determine what interest rate you'll pay.
How often should I check my score?Check your credit score at least once a year and several months before applying for a home mortgage or other major loan.
Your credit score is not included in the free copy of your credit reports that you’re entitled to receive each year. But if you're applying for a major loan, you should purchase scores from all three credit bureaus. You can get all three credit scores and reports at myfico.com.
What components make up my score?
| 35% | |||||
| Lenders look for | A history of paying your bills on time over the past seven years | ||||
| What affects your score |
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| Bottom line | Wintering in Mallorca? Make sure you have a faultless plan for getting the AmEx paid on time. |
| 30% | |
| Lenders look for | Your “credit-utilization ratio,” or what percentage of your available credit you’ve used
|
| What affects your score |
|
| Bottom line | Shopping for a mortgage for your new beach house? Put off charging his-and-hers luxury watches until after the credit check. |
| 15% | |
| Lenders look for | Long relationships with creditors |
| What affects your score | “Average account age” measures the age of your oldest account, the age of your newest account and the average age of all your accounts |
| Bottom line |
|
| 10% | |
| Lenders look for | The number of times lenders have looked into your credit history in recent months |
| What affects your score | Too many inquiries make lenders worry that you’re taking on too much credit. Caveats:
|
| Bottom line | The more reliable you are at paying off your credit cards, the more cards you’ll be offered. Don’t succumb. |
| 10% | |
| Lenders look for | Your experience making timely payments on different kinds of loans |
| What affects your score | Credit cards, retail accounts, finance company accounts, installment loans like cars and mortgages and school loans all go into the mix. |
| Bottom line | A bank loan plus two to four credit cards that are older than six months should do the trick. |
- Pay your bills on time. Nothing affects your score more.
- Keep your credit card balance to one-third or less of your credit limit. Don’t charge big purchases for a couple of months before applying for a loan.
- Don’t consolidate your balances onto a single card. That reduces your total available credit limit and increases your credit utilization ratio. If the accounts are older, it may also reduce your average account age.
- Pay off your cards faster — at least a week before the statement date. That’s when most card companies make their reports to the credit bureaus.
How often should I check my reports? A 30-year-old Detroit man once famously learned that, according to his credit report, he was dead. As you can imagine, it’s not easy for a dead guy to get a car loan.
Most errors on credit reports aren’t that onerous. But 25 percent of credit reports do contain errors serious enough to damage their subjects’ credit scores, according to a study by U.S. Public Interest Research Group.
The only way to make sure your reports are accurate is to monitor them regularly. Review your reports at least once a year and any time you’re preparing to apply for a major loan.
You may order a free copy of all three of your credit reports each year at AnnualCreditReport.com or by calling 877-322-8228.
Look for even the smallest error. The wrong middle initial, as retired photographer Phillip R. Smith once discovered, can be a huge hassle. And an address you’ve never lived at might be a clue that someone else has applied for a credit card in your name.
- Report the error to each of the credit bureaus:
- Equifax. P.O. Box 740241, Atlanta, GA 30374; (800) 525-6285; http://www.equifax.com/
- Experian. P.O. Box 1017, Allen, TX 75013; (800) 301-7195; http://www.experian.com/
- TransUnion. P.O. Box 6790, Fullerton, CA 92634; (800) 680-7289; http://www.transunion.com/
- Equifax. P.O. Box 740241, Atlanta, GA 30374; (800) 525-6285; http://www.equifax.com/
- Notify your lender of any mistakes in your report if you’re in the process of applying for a loan.
- Create a paper trail. Keep good records of your phone conversations and copies of your e-mails and letters (sent via certified mail, of course).
- Inform the business that provided the bad data of your dispute.
- Make yourself heard. Submit a 100-word statement explaining your side of the story to each bureau and have it attached to your report.
If your identity has been stolen, also:
- Close any accounts that have been subject to fraud.
- File a police report.
- Raise a red flag. Ask each credit bureau to place a 90-day fraud alert on your file.
How can I learn more?
Get more information about your credit score at myFICO.com.
