Credit Scores: What are they all about?
Whether you are looking for a mortgage, a new car or applying for a credit card, the success of your application will depend on your credit score. It is important to know how credit scores are determined so you can improve them in the future.
Who determines credit scores
Credit scores, also known as FICO scores, after the first company - Fair Isaac & Co. – to develop a credit scoring system, are numbers used to rate you as a borrower. Scores can range from 300, the poorest credit rating, to over 850, the best. Credit scores of above 720 are very good and will result in lower interest rates and an increase in the amount of credit you can borrow. Scores below 620 will cause trouble for the borrower. The average American credit scores are somewhere in the region of 700 to 725.
Credit scores are based on the borrower's credit history, including:
- The length of the credit history as well as the types of credit
- Outstanding debts
- Frequency of credit applications
- Payment defaults, bankruptcies and late payments
- Most recent credit history is more important than past credit history
- Previous dealings with the bank or "issuer" you are applying to
This information is collected by three credit reporting agencies: Trans Union, Equifax and Experian. When a debtor applies for credit to any lender, be it a bank, landlord or other financing agency, that financial agency can request information from the three credit reporting agencies.
How to find your credit score
Under the 2003 Fair Credit Reporting Act, every American citizen is entitled to at least one free credit report a year, in some states you can apply more frequently. The credit reporting agencies are obliged to deliver this report within fifteen days of your request. You may request the report either in writing, by phone or e-mail.
According to the report: "A consumer reporting agency may charge a fair and reasonable fee...for providing the information required..." (section eight) This fee is usually no more than $10.
Another way to check credit scores for free is to register with an online credit scoring system site. Each of the reporting agencies run an online service that will tell you your score, however they often charge an annual fee for this service. Once you register, most of these sites give you a 30 day free trial. Log-in, look up credit scores and then cancel your registration before you are charged. Always check the free trial conditions before registering and never forget to cancel your subscription before the fees are charged.
How to improve credit scores.
If you are suffering from particularly low credit scores, perhaps because of bankruptcy or late payments, there are a number of things you can do to improve the situation:
- Make timely payments. Late payments will instantly spoil your credit rating.
- Manage your cards and try to keep to less than thirty per cent of your total credit limit on any one card.
- Take out a secured credit card which uses your own capital to secure the loan. This is a quick way to build up a responsible credit history and improve your scores.
- Don't apply for more credit than you need. Excessive applications may damage your scores.
- Check for mistakes in credit reports – sometimes the reporting agencies get it wrong. If they have made any mistakes, notify them immediately as you may be unfairly penalised for somebody else's poor credit management.
- Contact the Federal Trade Commission (Tel: 1-202-514-4100 / E-mail: ust.cc.help@usdoj.gov) to ask about debt management courses in your area.
Credit scores are often based on your most recent credit history so the sooner you begin managing your credit wisely the sooner your scores will improve. The FICO credit scoring system, whether you like it or not, the benefits of healthy credit scores are really worth the effort. Some of the benefits include: lower interest rates, higher credit limits, better mortgage deals, additional credit card rewards including cash-back credit card offers, travel rewards offers, low interest credit card offers and high credit limits on business credit cards. It is never too late to start improving credit scores.