Credit Scores

Your credit score plays a big role in what money is available for you to borrow and on what terms. Your credit will be checked when you enter into any kind of loan agreement, even signing up for a cell phone. Check out the Federal Trade Commission’s Web site for more Credit Facts for Consumers. A useful article about this is BusinessWeek’s “Anatomy of a Credit Score”.

1. How Is a Credit Score Created

Your credit score is a three-digit number credit agencies calculate using your bill-paying and debt histories as well as a statistical comparison to other borrowers.

There are several different credit score computation methodologies, but the most widely used is FICO. You can read up more about how a FICO score is calculated at Credit Education at myFICO.com, a Web site of Fair Isaac Corp., which created it.

FICO scores vary between 300 points and 850 points. Typically, people with a credit score of 700 or higher are in the best position to qualify for favorable loan terms including the best (lowest) interest rates. On the other hand, scores of 600 or lower are often considered “subprime”.

A credit score can change at any time. If you miss a credit card or mortgage payment, the lender will share that information with the credit agencies and it can negatively affect your score.Even if you pay off overdue debts, the credit reporting agencies can keep marks on your report for up to seven years. So it could take time for you to work to improve your credit score — even if you no longer owe money.

1. How Are Credit Scores Used

Your credit score indicates to lenders how risky it is to lend you money – and the likelihood you will repay them on time.

Lenders get your score – sometimes from a couple of different agencies, because the numbers vary – to help determine if they should lend you money and at what interest rate.

If you shop around for a loan, you’ll be asked to share your Social Security number so lenders can inquire about your credit score. (Too many such requests could go on your credit report and lower your chances of getting a loan at a good rate – apply for only the loans you are seriously considering.)

1. Improve Your Credit Score
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In order to find out your credit score, you’ll have to pay for it. Your best bet is to order your FICO scores at myFICO.com from both Equifax and TransUnion. (As of February 2009, you can no longer get your Experian FICO score, though lenders do receive them.)

In accordance with the Fair Credit Reporting Act (FCRA), every 12 months all Americans are allowed one free credit report from each of the three national credit agencies: Equifax, Experian and TransUnion. (For more background information about FCRA, check out this Electronic Privacy Information Center site on the subject.)

For an official credit report visit annualcreditreport.com, which was set up by the three national credit reporting agencies. It makes sense to order reports from all three agencies because they collect information from different sources and can sometimes have different information about your credit. It is important to carefully read your credit report and find out about any late credit payments (on your bank card, car loan or home mortgage) or defaults.

If you discover you need to improve your credit score, there are several ways to do so. First, ask yourself if you can pay off any debts quickly in full. Look at your credit card balances and limits. Know that any balance that’s at more than 25 percent of the limit will hurt your score slightly, and anything more than 50 percent will severely impact it, so strategically put money toward those, too.

To bring your credit score up in a hurry, you can also dispute any negative notation or remarks – like a 30-day past-due payment or charge-off – on your credit reports. If a problem – and the notation – is legitimate, you usually won’t be able to remove it. But you can get two legs up by contesting negative items in writing. The bureau must validate or remove the questionable information in a 30-day dispute period or it comes off your report forever.