Your Credit Score

What is a credit score? Your credit score, more commonly referred to as a FICO score, is a number that helps lenders determine your credit worthiness. The FICO score, which was developed by Fair Isaac Co., uses a complex mathematical formula to develop a score based on your credit history. Credit scores range from 300 to 850 and will differ slightly from each credit reporting agency due to variances in how lenders and other businesses report to the agencies.

How do I check my score? Unfortunately, credit enquiries can lower your score, so it is important to check your credit wisely. Understand that there is a difference between a “hard Inquiry” and a “soft Inquiry”. A hard inquire is an inquiry you initiate as part of a request for credit. A soft inquiry is simply you checking your credit.

Companies that offer free credit reports as an incentive to visit their website are doing so at your expense. One additional credit check can lower your score by as much as 5 points, which can be the difference between getting a loan and not getting a loan. The FICO model attempts to weed out “rate shopping” by looking at multiple inquires in any 14-day period as one inquiry. However, the FICO model often sees each inquire as a different type of loan search, which makes it appear as though you are seeking several new loans, not just one.

There are companies that will provide you with a credit score, but be aware! Not all scores are FICO (Fair Isacc Co.) scores. Most companies will sell you a credit score that uses a different scale. I recommend that you focus less on your score and more on the information contained in your credit report. I believe this is important because it is possible to have a FICO score in the 700 with 1 recent mortgage late. Even though you have a great score, that mortgage late could stop you from getting a new loan.

If you feel you must see your credit score, you can order one with your free credit report for a fee or you can go to www.creditkarma.com www.quizzle.com or www.credit.com

I strongly recommend you check your credit report every 4 months. Thanks to the 2003 Fair and Accurate Credit Transaction Act (FACTA), you can now get a FREE copy of your credit report from each bureau once every year. To obtain your free credit report, the only place you should go is to www.annualcreditreport.com . This is the website set up by the bureaus to comply with FACTA. This is considered a soft inquiry so you should have no fear of hurting your scores. There are 3 bureaus; if you check one every 4 months, you catch mistakes faster than if you check all 3 bureaus at the same time.

What is a good score? There is no magic cut-off score used by all lenders. Generally speaking, a score below 620 is considered poor and above 720 is excellent.

How do they determine your score? The FICO score is based on five main categories. It is important to note that a given factor may have more weight for one individual than for another based upon the difference in credit history, credit usage, and type of credit used. Listed below are the five main categories and how they affect your score.

1. Payment History. Have you been paying your bills on time?

2. Amounts Owed. Owing money on your accounts is not necessarily bad. However, being close to your maximum credit limit can hurt your score. Having several accounts “maxed out” will have a definite negative impact.

3. Length of History. The score takes into consideration both the oldest account and an average age of all your accounts. In general, a longer credit history will increase your score.

4. New Credit. Are you taking on new debt? Do you have multiple new accounts? Inquires remain on your credit report for 2 years, although FICO scores only considers inquires from the past 12 months.

5. Types of Credit in Use. The FICO score will take into consideration the types of accounts you have; mortgage, auto, department store, etc. However, it is not necessary to have one type of each account, and it is not a good idea to open new accounts that you don’t need.

How do you improve your score? It may sound simple, but paying your bills on time each month is the best way to build a good credit score. In addition:

• Pay down high balances
• Limit the amount of open credit accounts
• Keep the amount of credit inquires to a minimum when shopping for a loan. I recommend providing lenders with a copy of your credit report when shopping for a quote.
• Only apply for the credit you need. Don’t apply for credit simply to save on purchases at department stores. The money you save today might cost you even more tomorrow.

This article was designed to give you a brief overview of how the FICO score works and how it affects you. If you would like more information, please contact me for your free credit consultation.

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