Credit Scoring: What's it all about?
'I am not a number!' – but unfortunately, in the world of personal finance, you are. Whether you like it or not, this number dictates lots of things about your daily life from what kind of car you can drive to the type of house you live in. What is this number that means so much? Your credit scoring.
How do I know what my credit scoring number is?
You can find out what your credit scoring number is pretty simply. In 2003 the American congress passed legislation called the Fair Credit Reporting Act. According to the act:
"Each national credit bureau must provide a free report upon request within 15 days of a request by phone, Internet, or mail" – ConsumersUnion.org
You can claim this report at least once every twelve months, although some states have increased the frequency. Simply contact any of the three credit reporting agencies: Equifax, Experian or Trans Union and ask for it.
Under section eight of the act, the credit agencies are allowed to charge a "fair and reasonable fee" for compiling and posting the information, which shouldn't be more than around $10.
What does my credit score number mean?
The information you receive from the credit agencies will contain a full credit history report as well as your credit scoring number, also sometimes referred to as your FICO number.
Your credit scoring will be a three digit number between 300 and 850, with 850 being the top of the scale and 300 being a very poor rating. The average American credit rating is somewhere in the region of 700-725. If it's above 720 you're doing really well but you don't want it to dip below 620, if it does it's time to do some credit repair.
One of the first things you want to do when you get your credit scoring is to have a good look trough what's written in the credit history report. It's common for mistakes to crop up through the sheer weight of reports processed each year and if your report happens to contain a mistake it could have an adverse effect on your credit scoring. For instance, if your name is mixed up with another person by the same name who has defaulted on payments, you could see yourself the wrong side of the 620 mark.
If you do spot any mistakes, contact the credit reporting agency as soon as possible. They should correct the mistake and send you a fresh report to review.
My credit scoring is really bad, help!
If your credit score isn't as good as you'd hoped, don't worry! There are a number of things you can do to improve it:
Organise your debt: using less than twenty-five to thirty percent of your total credit limit has a positive impact on your credit scoring. You may need to increase the limit on your card to accommodate this. At the same time, close down any unnecessary or unused accounts.
Timely payments: always make payments on time, never late. Your most recent credit history is what lenders will be looking at so even if you have a pretty good payment history to date, making one late payment now will damage your credit scoring.
Take out a secured credit card: if you have a particularly bad scoring, taking out a secured credit card can really help. With a secured credit card you don't borrow from the bank. You are actually borrowing from yourself. An amount equal to the amount of credit you require is used as collateral to "secure" the card. This means that you shouldn't be able to spend more than you actually have secured and using the card each month can quickly build up a responsible credit history.
Take out an instalment loan: Taking out an instalment loan from a bank and paying the loan back monthly in a timely way will help to build up your credit score.
Student Credit Card or First Time Credit Card: If you are a student and new to the credit market your credit score could be zero or very low. There are many advantages to getting a student credit card because the banks and issuers make it easier for those who are enrolled in college and higher education courses to get a first time credit card. A student credit card or a first time credit card are great ways to enter the credit market and build up your credit history.
Don't apply for more credit than you need: excessively applying for credit looks bad and will bruise your credit scoring. Only take out credit and loans that you really need and are sure that you can pay back in a timely fashion. Close down accounts that are no longer used.
Get your credit report once a year: It is always worth having a credit score improvement plan and to apply for your free credit report whenever you are eligible (usually once a year) so that you can monitor any changes to your scoring. Also you can review the report and see if the reporting agency has made any mistakes.