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Understanding Your Credit Score

First, who’s keeping score? The credit industry is. Every time you apply for a new credit card, a mortgage, perhaps even an insurance policy or a job, your application is judged in part on your credit score.

A credit score is a three-digit number that lenders use to objectively measure your creditworthiness. Each lender sets different ranges for what it considers “good” and “bad” credit scores. Consumers with lower credit scores often pay higher interest rates on mortgages and credit cards because they’re viewed as riskier customers (based on a scale with 900 being the highest score). Your credit report includes how much credit you have and how you repay your bills; public record information, bankruptcy, tax liens, or monetary judgments filed against you; and identity information such as name, nicknames, Social Security number, birth date, current and previous addresses, and names of past and current employers. It also lists the names of anyone who has obtained a copy of your credit report for any reason.

If you’re shopping for a new car and a dealership pre-approves you for a loan, it probably ran a credit check, which shows up on your credit report as an inquiry. Too many inquiries spread out over more than a month can hurt your credit score. That’s because creditors view multiple inquiries, resulting from multiple applications, as a sign that you’re scrambling for credit and may be taking on too much debt. To avoid the risk of lowering your credit score, it’s best to shop but not apply for a loan until you’ve identified the particular loan you want. If they ask for your license or social security number before a test drive, someone is pulling your credit.

What makes up the score?

  • 30% Based on payment history – more weight is given to current pay history
  • 30% Capacity
  • 15% Length of credit
  • 10% Accumulation of debt in the last 12-18 months – number of inquires – opening dates
  • 10% Mix of credit – installment (raises) vs. revolving (lowers) – number of finance company loans

Approximate Credit Weight for each year

  • 40% (Current to 12 months)
  • 30% (13 – 24 months)
  • 20% (25 – 36 months)
  • 10% (37+ months)

What doesn’t affect the score?

  • Debt Ratio
  • Income
  • Length of Residence
  • Length of Employment

What actions will hurt the score?

  • Missing payments (regardless of dollar amount)
  • Credit cards at capacity
  • Closing cards out (this lowers capacity)
  • Shopping for credit excessively
  • Opening numerous trades in a short period
  • Having more revolving loans in relation to installment loans
  • Borrowing from finance companies

How to improve the score?

  • Pay down on credit cards
  • Do not close credit cards because capacity will decrease
  • Continue to make payments on time
  • Slow down on opening new accounts
  • Acquire a solid credit history with years of experience
  • Moving revolving debt to installment debt

Checking Your Credit Report

You should make sure the information in your credit report is correct. Not only is your credit score based on this information, but lenders also review this information in making credit decisions. Review your credit report from each credit reporting agency at least once a year and especially before making a large purchase, like a house or car. To request a copy, contact the credit reporting agencies directly:

Equifax: (800) 685-1111,
Experian (formerly TRW): (888) 397-3742,
TransUnion: (800) 888-4213,

Important information from the Federal Trade Commission, the nation’s consumer protection agency: is the ONLY authorized online source for you to get a free credit report under federal law. You can get a free report from each of the three national credit reporting companies every 12 months. Some other sites claim to offer "free" credit reports, but may charge you for another product if you accept a "free" report.

If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report. Your lender will need to reorder your credit report and score once any changes have been made to your information at the credit reporting agency. Small errors may have little or no effect on your score. If there are significant errors, however, the lender may disregard the score.

Visit myFICO for more educational information regarding your credit report.