Years ago your credit score was a big secret, known only to a select
few such as your mortgage and credit card companies. In 2000, Fair,
Isaac Co., the major supplier of credit scoring software, announced
they would begin sharing credit scores, also known as FICO scores, with
consumers.
What is a credit score? A credit score is a tool used by
credit grantors to determine your ability to repay your debts. The
information in your credit report is compared and evaluated against
tens of millions of other consumer credit reports which gives you a
credit score or number ranging from 350 (highest credit risk) up to 800
(lowest credit risk). A higher score means you are less likely to make
late payments or default on the credit extended to you. Your credit
score will change as the information in your credit report changes over
time.
Following is a short overview of the five major categories of
credit information that are used in determining your credit score and
guidelines for scoring higher.
Payment History (35 percent) Paying your
current bills on time is the single most important factor in obtaining
a high credit score. This category includes credit cards like Visa and
MasterCard, retail accounts, installment loans such as those for a car
or education, loans from finance companies, and home mortgages. Also
included in this category are matters of public record such as
bankruptcies, liens, wage garnishments, and collection accounts. The
key to a higher score: pay your bills on time!
How Much Debt You Carry (30 percent) This
category considers the amount of debt you owe on your various credit
accounts. If you've "maxed out" your available credit, this could
indicate that you are overextended financially and won't be able to
make your payments on time or repay your debts completely. This
category also examines how many of your accounts carry balances and how
much money you've already repaid. Closing accounts with a zero balance
does not generally improve your score in this area. The key to a higher
score: Keep your credit card balances low.
Length of Established Credit (15 percent) The
longer you've had credit accounts the higher you will score in this
area. The age of your oldest account and the average age of all your
accounts are used in determining your score. Old accounts that have
gone unused are also considered. The key to a higher score: Establish
good credit and keep accounts active.
Applications For New Credit (10 percent)Opening
multiple credit accounts within a short period of time represents a
greater risk of becoming overextended. Each time you apply for credit
an inquiry is made into your credit history and these inquiries show up
in your credit report. A high number of credit inquiries will lower
your score.
Some inquiries are not considered in your score. These
include: requests by you for your credit report, inquiries from
companies for pre-approved offers or companies that already do business
with you, along with inquiries from potential employers. Some requests
for credit are treated as a single inquiry especially when you are
shopping for the best loan rate. The key to a higher score: Only apply
for and open new credit accounts when you need them.
Your Credit Mix (10 percent) This category
examines the types of credit accounts you have and how many of each.
Can a person have too many accounts? Yes and no. It really depends on
whether you have an established credit history or no credit history at
all. The key to a higher score: Open credit accounts only if you intend
to use them.
Don't despair if you have a low score or are just beginning to
establish credit. Your credit score will change for better or worse
depending on how well you understand and use these five keys to your
advantage in planning your financial future.
