What’s Up with the Whole Credit Score Thing?

What’s Up with the Whole Credit Score ThingExperian. Equifax. TransUnion. You know who they are and you know what they do, but do you know the FICO score they gave you?

Your credit score is an indicator of your creditworthiness. Your credit history and credit score are vital pieces of information which are key to helping you secure your financial life. Think about it this way, every credit and debt move you make is tracked and then used to compute a FICO credit score for you. The interest rate you get on a home or car loan, for example, is, in part, determined by your credit score. Also, when you apply for a credit card or a charge card at a retailer, your interest rate is influenced by your score. Your FICO score is often used by insurance companies as one factor they consider when they set your premium rate. It also can come into play when you try to rent a home, as landlords will check your FICO score to see if you are reliable. Even employers will sometimes check the FICO score of job candidates and cell phone companies might not offer you a plan if your FICO score is too low.

A good FICO score is a financial boon for you, while a low FICO score can cost you money and maybe even more.

If you don’t know your FICO score, you need to find out. Because each credit reporting bureau places a slightly different emphasis on various parts of your credit history, it’s worth taking a look at each bureau’s version of your credit score. You are entitled to order a free credit report from each agency, once, every year. “I recommend getting one report every four months. For example, you might start with Equifax and then four months later get your Experian report. After four months passes, your TransUnion report. By using this system you have created your own ongoing checking system. For free. I think it’s a lot smarter than paying money to any of the credit bureaus for one of their ‘monitoring’ services,” suggests financial expert Suze Orman in her book, The 9 Steps to Financial Freedom.

Orman warns to be careful how you go about getting your free report. “Plenty of businesses pretend to offer it for free, but then sneakily get you to pay for other services. You should never ever have to share your credit card information to get your credit report. Simply go to www.annualcreditreport.com to get your report,” she says.

Once you receive your reports, be sure the information in each report is correct. “It’s not uncommon for you to see misspelled names and addresses and old accounts you closed down years ago, but are still showing up on your report as active. There’s also a huge problem with identity theft. You can have big problems if someone steals enough of your private data – typically a Social Security number and name is enough – to open accounts in your name or simply gets access to your credit card number and makes unauthorized charges on your account. Any wrong information is going to pull down your FICO score, so this is why you need to make sure your credit reports are clean and up-to-date,” Orman explains.

Your FICO score will range between 280 and 850. If your score lands in the 280-559 range, you have a poor rating. Basically, no lender or company will want to do business with you, without charging you some large fees and higher interest rates.

The formula, which is based on the FICO credit-scoring model, breaks down as:

280-559: POOR
560-659: FAIR
660-724: GOOD

725-759: VERY GOOD

760-850: EXCELLENT

The main factors involved in calculating your credit score are the number of accounts you have; the types of accounts; your available credit; the length of your credit history; and your payment history. Each of these factors is assigned a numerical value and then weighted based on how prominently they affect your credit worthiness.

Your credit score also reflects how many new credit accounts you have opened, compared with the total number of “tradelines” in your credit file. Your credit score takes into account how many recent requests for credit you have initiated, as indicated by inquiries by creditors to credit reporting companies. These inquiries are known in industry jargon as “hard pulls,” of your credit.

Your credit score does not take into account requests a creditor has made for your credit file or credit score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your own request for a copy of your credit history (known as “soft pulls” of your credit).

No matter what your credit score, there are a number of different steps you can take to help change your credit history and improve your score. Negative information only stays on your credit report for approximately seven years, so improving payment habits will increase your score over time. Follow these tips to help you boost your score:

Apply for a credit card if you don’t have one. If you don’t qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card which reports to all three credit bureaus. Be sure to use the card monthly and pay it off, in full, each month.

Take out an installment loan. You’ll get the fastest improvement in your scores if you show you’re responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans). If you already have an installment loan on your credit reports, consider adding a small personal loan which you can pay back over time. Again, you’ll want the loan to be reported to all three bureaus, and you’ll probably get the best deal from a community bank or credit union.

Pay down your balances. Paying off your installment loans (mortgage, auto, student, etc.) can help your scores, but typically not as dramatically as paying down – or paying off – revolving accounts like credit cards. Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 30 percent of the credit limit on each card can really help. Getting balances below 10 percent is even better.

Underuse your cards. Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.

You often can increase your scores by limiting your charges to 30 percent or less of a card’s limit; 10% is even better

Know your limits. Make sure your reported credit limits are current vs. lower than they actually are. You don’t want it to look as though you’re maxing out the plastic each month. If the card issuer forgot to mention your newly bumped-up credit limit, request this be done.

Don’t close any cards. Canceling a credit card will cause your available credit to drop, which doesn’t look good to a bureau. One way to keep a card active is to use it for a recurring charge like a utility bill. There’s room for it in your budget, right?

Pay your bills on time. Your payment history – including the ones you pay late or skip altogether – makes up a whopping 35 percent of your FICO score. If you’re absent-minded or merely overwhelmed, then automate your payments.

Pay your bills twice a month. Using too much of your credit limit at any given moment doesn’t look good. Suppose your limit is $5,000 and you’ve charged up $4,900. Sure, you plan to pay in full by the 18th of the month – but until then it looks like you’re maxing out yet another card. Instead, make one payment just before the statement closing date and a second payment right before the due date. The first will likely reduce the balance the credit bureaus see and the second makes sure you won’t pay interest or a late fee.

For more information on Summit Brokerage Services, visit www.joinsummit.com or contact us at (800) 354-5528.

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