Understanding Your Credit Score

In today’s world, your credit score is one of the most important factors involved in lending.

Most lenders, no matter what you are buying, not only make their decisions based in part on your credit score but, more importantly, determine the interest rate you are charged based on your credit score.

What is a credit score?
It is the number that creditors use to help them decide whether to extend credit to you and also what rate of interest to charge you. In most cases, the lower the credit score, the higher the risk. There are numerous types of credit scores, but the most prevalent is the credit bureau score. The credit bureau score is based solely on the information contained in your consumer credit reports.

What does your credit score do for you?
It gives lenders a quick and easy way to determine your probability of repayment. Not all lenders, however, base credit decisions solely on your FICO score. Many consider other criteria like job time, residence time, down payment and other factors to determine whether or not to extend credit.

What is a good score?
Scores range from the low 400s to well past 800. The higher the score, the better the credit rating. Most lenders use a break of somewhere around 620 as the determining factor of a regular loan versus what is called a “sub-prime” or higher-risk loan. Some lenders will not extend credit to people with under 620 credit scores, and other lenders will offer those loans but at a higher interest rate.

Aren’t there several credit bureau agencies?
Yes, there are three primary credit bureau companies: Equifax, Experian and TransUnion, and each of them refer to their credit scores by different names. At Equifax for instance, their score is called the beacon score. At Experian, it is the Experian/FICO score and at TransUnion, it is called Empirica.

How do I find my credit score?
You can purchase your FICO score right over the Internet at either http://www.myfico.com or at the Web sites of any of the major bureaus. Besides your FICO score, you can get your entire credit report, details on how to read your report and ways to raise your scores.

What makes up a FICO score?
Generally, there are five criteria that make up the score. The biggest driver is payment history, in other words, how you have paid your bills. This accounts for 35 percent of your score. Thirty percent of your score is based on the amount of money you owe lenders. The length of your credit history makes up 15 percent. New credit makes up 10 percent of your score and the remaining 10 percent is the types of credit you use. Things that have no effect on your score: race, religion, sex or marital status, your age, length of employment, job description, where you live or any items reported as child or family support.

How long does information stay on my credit report?
Good or bad, it is with you for seven years unless it can be proven that it was a mistake.

What is an inquiry?
This is the record of any person who has checked your credit report. This is another good reason to check your credit report yearly. A lot of inquiries will lower your FICO score because it shows you are applying for new credit. (However inquiries will not drastically change your score.) If you have inquiries from mortgage lenders or automobile dealers in a short period of time, this will not affect your score. Their systems consider this as one inquiry and recognize that you are shopping for a specific product.

What if you are denied credit?
If you are turned down for credit, the lender must notify you in writing within 30 days with the reason you were turned down. At this point, you have 60 days to request a free credit report from any of the credit reporting agencies. The Equal Credit Opportunity Act covers both of these.

Additional Resources

To just find out what your FICO score is, go to: www.myfico.com
To read the Federal Trade Commission rules on the Equal Credit Opportunity Act, go to: www.ftc.gov.

Excerpted with permission from Jerry Reynolds-The Car Guy.