Credit Score 101

We hear so much about how important a credit score is. What exactly is this? How do you know if the score is good?

Let’s start by looking at what a credit score is and what it is used for.

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Credit score

Definition: a number that lets a lender anticipate the ability to repay a loan.

Used for: one factor that helps the lender (like a bank) to decide if they will loan money and if so, what interest rate or down payment. It is used when buying a car, house, credit cards, etc.

The numbers range from 300 to 850.

There are FICO Scores and Vantage Scores.  We’re going to focus on the FICO Scores.

300-579    Very Poor
580-669    Fair
670-739    Good
740-799    Very Good
800-850    Exceptional

What goes into determining the credit score?


It looks at your credit report, which is a summary of your financial debt history. It does not take into account any income or savings.

1. What is the payment history?

Were payments made on time or late?
How much was paid?
Number of bills/amounts due?
How long ago were some of the items?

Payment history is the largest factor in the credit score calculation, so it is extremely important to a potential loaner.

2. Were there bankruptcies, tax liens, etc.?

3. How much debt do you have?

4. How many different account types does your credit history have?

Major credit cards
Retail credit cards
Mortgage loans
Car loans
Other

5. What is the age of the debt, type, and number of debts outstanding?

6. How many new credits have been opened recently?

7. What is the number of credit report inquires?

The free credit report that is requested by you does not get counted in this number.

8. What is the credit utilization rate?

This is basically a relationship of how much do you owe in credit cards versus the credit card limit. If you have $6,000 outstanding in credit cards and these credit cards together allows a credit card limit of $15,000, the credit utilization rate is $6,000/$15,000 or 40%. Generally, the lower the % is interpreted as a better management of credit cards.

Other Information

There are three major credit reporting agencies:

Equifax
www.equifax.com

Experian
www.experian.com

TransUnion
www.transunion.com

Each agency calculates a credit score based on the information they have on your credit report. The majority of data is the same. Creditors may not report to all three agencies, so as a result, they will have different scores.

These websites are great resources to learn more about credit scores.

Free Credit Reports

The federal law allows you to get 1 free credit report every 12 months from each of the reporting agencies.  Request this to check the data. It is much easier to do this routinely instead of waiting to make a big purchase and then trying to correct it then. This process is also a great way to check for identity theft.

The 3 credit agencies have set up a central location to get each of the free reports.

www.annualcreditreport.com

Be careful about other places offering free reports as they may be tied to free trials of service and if you do not cancel, you get charged. You should always double check and then check a few more times anytime you give your social security number to ANY one or website.

The information asked when you request your credit report will include name, address, social security number, and date of birth. They will also ask you information that others would not know.

Request your report so you can review for accuracy.

The free credit reports will not show a credit score on it, but credit card companies generally can give you the credit score.

Here are books related to credit scores and reports to learn more.

In conclusion, a credit score is a way that lenders can estimate the ability to repay a loan. Credit scores are based on credit reports which are collected by 3 nationwide reporting agencies: Equifax, Experian, and TransUnion. Federal law allows you to receive 1 free credit report from each agency every 12 months and there is one central location set up to do this. By requesting these reports, you can review the information for accuracy and look for identify theft. Credit scores range from 300-850 with the higher the score the better.

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We hear so much about credit score. There are tips for improving credit scores, but what are the basics of what this is? Read more about credit score 101.

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