We have all been bombarded recently with talk about credit scores. It seems as though it affects every aspect of our purchasing power, from where and how we live, to the rates on our car insurance.
A credit score, or more accurately a FICO score, (named after the company that developed the system, Fair Isaac & Company) is comprised of one’s credit accounts, payment history and other information. The FICO score is a closed number rating system which starts at 300 and maxes out at 850.
Most experts say the best number to have is 720 or above. At 720, you are viewed as a safe risk and typically receive a loan without problem and at a low interest rate. However, if your number is below 700, you may want to consider making some changes before trying finance a new loan a refinance a current loan. If you do not know your credit score, the web site myfico.com will sell you a comparison of your three credit reports from the three main companies: Experian, Equifax and TransUnion along with your FICO score for $40.
Basically your FICO score is created based on your past history in the following categories:
· 35 percent Payment History: “Having a long history making of payments on time and no missed payments on all credit accounts is one of the most important items lenders look for.”
· 30 percent Amount Owed: “This measures the amount you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk of late payments in the future and this can lower their credit score.”
· 15 percent Length of Credit History: “In general, a credit report containing a list of accounts opened for a long time will help your credit score. The score considers your oldest account and the average age of all accounts.”
· 10 percent New Credit: “Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, “pre-approved” credit offer. Also, to compensate for rate shopping, the score counts multiple inquiries in any 14-day period as just one inquiry.”
· 10 percent Types of Credit in Use: “Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered.
Now that you know what a FICO score is and how to obtain it, the next step for most is how can you raise the score. If you are considering a loan or refinancing sometime in the near future, it really is never to late to try to raise your score. Six months of “good behavior” can have an impact on your score. Because payment history comprises the largest part of your FICO score, making a habit of paying bills and other payments on time is obviously going to have the largest positive impact.
The fastest way to improve your score is to pay down balances. This lowers the amount of credit you’re using relative to how much credit you have available to you. Remember, FICO scores reward people who use a smaller percentage of their available credit. Some people suggest never using more than 50 percent of your limit on any card.
Avoid opening a lot of new accounts at once – this makes lenders queasy – particularly if you don’t have a long credit history. Many recommend not having more than five credit cards. If you decide to close some credit accounts, close the newer accounts first. However, don’t close more accounts than necessary because this lowers your ratio of debt to available credit.
Rotate and use all of your cards – a dormant credit account will not help your score. If you do have a late payment, it’s worth a call to the lender to see if they will remove this information from your records in a “goodwill adjustment.” You can choose to dispute the late payment report. While it’s in dispute, the item will stay on your credit report but not factor into your FICO score.
While there’s no question that having a good credit score is essential, it’s also important to point out that FICO scores do not take your age, income, assets or employment history into account. Specific lenders may pay closer attention to income, assets and employment history. Also, FICO scores treat all late payments equally. However, an auto finance company, for instance, can look at customized scores tailored for their industry. If you’ve been late on credit card payments but never missed a car payment, they may take this into consideration.
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