While everyone says you should check your credit score, what you should be checking are your scores. In fact, you have more than one. That’s because lenders, creditors, and the three national credit-reporting agencies—Equifax, Experian, and TransUnion—all have their own particular methods and formulas for calculating what kind of a credit risk you are.
The most widely-used rating is the FICO score. Many people think the term “FICO score” is just another way of saying credit score (sort of the way people call all adhesive bandages Band-Aids and all facial tissues Kleenex). It’s not. While FICO is the oldest and most popular credit-scoring system, the Big Three credit-reporting agencies have their own rating system (Equifax, Experian, and TransUnion).
That said, the credit-reporting agencies all base their individual scoring systems on mathematical models developed by Fair Isaac. So while your FICO score may differ slightly from the scores calculated by the credit-rating agencies, it’s not likely to be wildly different. In other words, if you have a great FICO score, chances are your credit score from the three credit bureaus will be pretty good too. The opposite is also true: bad FICO score, bad score from the bureaus.
WHAT GOES INTO YOUR CREDIT SCORE
So how do the credit-rating companies decide what credit score to assign you? What they do is take your credit history based on your credit reports and run it through a complicated series of calculations. In the case of FICO, the result is a number somewhere between 300 and 850. This is your FICO score. Anything over 720 is considered good. Score 740 or higher and most lenders will give you their best deals.
On its website, Fair Isaac spells out how it weighs the various factors that go into calculating your score. They are, in order of importance:
35% of your score: Payment History. Do you always pay your bills on time or do you have delinquencies? Any bankruptcies, liens, judgments, garnishments, etc., on your record? PAY ATTENTION TO THIS! Simply paying your bills on time impacts more than a third of your score.
30%: Amounts Owed. How much do you owe? What kinds of debt do you have? What proportion of your total credit limit is being used? Most experts agree that a credit utilization of more than 30% will hurt your score. So if your Visa card has a credit limit of, say, $5,000, you’ll want to avoid carrying a balance of more than $1,500 at any one time. According to FICO, more than half of all credit card users manage to do this. On the other hand, one in seven are using more than 80% of their available credit.
15%: Length of Credit History. How long since you opened your first credit account? How old is your oldest active account? (The average is 14 years; the longer your history, the better.) This is why you should no longer close old accounts you don’t use—and why when you are asked to “opt out” now by credit card companies you should still keep the accounts open even after you have paid them off.
10%: New Credit. How many accounts have you opened recently? How many recent inquiries by potential lenders? A lot of new activity makes the credit-rating agencies nervous.
10%: Types of Credit Used. How many different kinds of active credit accounts do you have? A varied mix of credit—e.g., credit cards, installment loans, mortgages, retail accounts, etc.—is a plus; too much of one type is a minus. According to FICO, the average consumer has 13 active credit accounts at any given time—nine of them for credit cards and four for installment loans.
The reality is, your credit score is your financial GPA, and you need to know where you stand in the eyes of the creditors. To get your scores and explore how you can work on your financial health click HERE!