Learning all about what a credit score is, how it affects you and tips on how to improve your score.
What is a FICO score and why is it important?
To secure the best possible financial future, it is important that we
present ourselves as responsible consumers to potential lenders. One of the
ways in which we can do this is to become familiar with what our FICOR score
is, what it reveals about us, and how we can improve it.
Beginning in the mid 1950's, The Fair, Isaac and Company began developing a
system for calculating an individual's credit risk that would allow lenders
to assess that risk in a more timely and objective fashion than had
previously been employed. The score is derived by an algorithm that weighs
and balances the many components of your past credit history--both the
positive and the negative--and assigns a number to the result. This number
is called the FICOR score and it is used by lenders to predict the
likelihood that the borrower will pay off a loan.
There are three major credit reporting agencies that compile credit scores similar to
the FICOR score. Equifax uses the BEACONR score, Experian employs the Fair
Isaac Risk Score and TransUnion's version is called the EMPIRICA score. Each
of these three bureaus compile their own information based on the data they
have available to them so therefore the results may vary slightly, but
should generally be similar.
Since the idea of a credit score is to provide a financial portrait at any
given time, keep in mind that your credit report scores change with each transaction, and
may increase or decrease monthly depending on your spending or payment
trends.
What the Scores mean
The score result is just one factor in determining who be an acceptable
applicant. Each lender has its own criteria and acceptable score level that
qualifies the borrower for a loan. Often lenders choose to accept lower
credit scores at higher interest rates and reserve the better rates for
those with higher credit scores. Therefore knowing your score can benefit
you as it may put you in a position to negotiate for a better interest rate.
The score is a three digit number ranging between 300 and 850. The average
American has a score of around 700. Since your score is based on your credit
history and can only be improved with time, it is wise to consider carefully
each financial move and how it will affect your FICOR score. Remember that
your negative credit history is weighed against your positive history so
that even if you have good credit, it may not have been established long
enough to accurately predict how you will handle the payment of a larger
loan. The following actions will bring your score down and reflect poorly on
your reliability as a borrower;
- History of late payments by over 30 days or bad debts.
- Collections.
- Maxed out credit cards or cards that carry a balance that amounts to more than 80% of your high credit limit.
- Number of balances carried
- Number of new accounts opened in the last year
- Too many inquires into your credit report over a short period of
time
How do I find out my score?
You can and should find out your score yearly to keep informed about your
credit history and to check for errors or fraud. You can purchase either
just your FICO score or all 3 credit report agencies scores through any of the
following websites.
Equifax
Experian
TransUnion
Depending on your circumstances you may qualify to obtain this information
for free in any of the following circumstances;
- If you are a resident of Colorado, Georgia, Maryland, Massachusetts, New
Jersey or Vermont.
- You're receiving public assistance.
- You're unemployed and planning to apply for a job within 60 days.
- You believe that your file contains errors due to fraud.
You may also qualify for a free copy of a credit report if you have been denied
credit. The Fair Credit Reporting Act states that the lender is required to
give you the reasons why your score wasn't high enough to qualify and if you
have been denied credit within the last 60 days, the lender must give the
name of the credit bureau that issued the report.
How do I increase my score?
Generally speaking, credit scores can only be increased over time, through regular
payment of bills and loans; however there are things you can do now to help
speed the process. Some examples are;
- Examine the balances on your credit cards and work to lower the ones that
are above 80% of their maximum credit limit.
- Limit yourself to just a few credit cards and use them responsibly. Credit
Cards that have been in your possession for longer than 12 months reflect
better on your score.
- Pay bills on time.
- Apply for credit only as needed. Too many inquiries on your report over a
relatively short period of time can make lenders assume you are being turned
down often or are a habitual spender.
- Obtain your report yearly and correct any errors.
- Examine your report for inactive accounts such as department store cards
you no longer use. Contact the finance department to have the account closed
and when you do so, request a letter stating that the account was closed by
customer request.
How do I challenge errors on my credit report?
You have the right under the Fair Credit Reporting Act to dispute any
inaccurate or fraudulent information that may appear on your credit report.
Once you have discovered an error, contact the credit bureau that issued the
report and state in writing what you found to be inaccurate. Attach copies
of documents that support your position; you may wish to include a copy of
the report with the errors circled or highlighted for their convenience.
Upon receiving your request, the credit bureau must reinvestigate the claim
within 30 days. They will then contact the party that submitted the item and
attempt to resolve the dispute. If the credit bureau fails to contact the
other party, or the other party fails to respond to the inquiry then the
disputed information must be removed from the report.
If the party maintains that the report is correct then the information
will remain unchanged.
You then have the right to submit a statement of 100 words or less with
respect to the disputed but unchanged information. This will become part of
your permanent file and a summary of this statement will be attached to all
future credit reports.
By taking these steps to repair and safeguard your credit history, in time
you can put yourself in a more favorable position to obtain better credit
rates, thus securing a positive financial future.
Melanie Cossey
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