Consumers have been "left in the dark" when it comes to explaining credit scores and how they affect their ability to get a loan. Now, with the Internet and direct access to self-serve websites consumers have better insight into personal credit, security against identity theft, and how to correct or improve one's credit score.
What is a Credit Score?
A credit score is the result of an equation that considers many different types of information that is contained on your credit report. When you work with a lender, they will usually review your credit report and credit score, along with other factors, such as your ability and likelihood to repay debt. Credit scores are also called "FICO scores" because most credit scores are produced from software based on a model developed by Fair Isaac and Company ("FICO").
What Makes Up a Credit Score?
FICO scores range from 300 to 850. The higher score indicates a lower credit risk. FICO scores are calculated from many sources of information in your credit report, which is based on the importance of the following five categories:
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Payment History 35%
Were Payments Made on Time?
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Amounts Owed on Accounts 30%
Is the balance owed close to the limit?
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Length of Credit History 15%
How long have your accounts been open?
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New Credit 10%
How many new accounts have been opened?
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Types of Credit Used 10%
Mortgage, auto, consumer finance accounts, revolving and installment loans. |
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What Can Affect Your Credit Score?
Your FICO score is a "picture" of your credit history at a given point in time, and can change based on the factors discussed above.
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Late Payments - Pay your bills on time and if you have missed a payment, get current. |
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Credit History - When you payoff a debt or collection, or close an account, the credit reference still remains on your credit report for a minimum of seven years. |
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High Balances - Keep outstanding balances low on credit cards and other "revolving" accounts |
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New Credit - If you have been managing credit for a short time, don't open a lot of new accounts. |
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How Can You Improve Your Credit Score?
You can improve your FICO scores by managing your credit. Being responsible over time and following some basics:
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Make sure the information in your credit report is correct. You are entitled to one free credit report annually from the three credit bureaus - Experian, Transition, and Equifax. |
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Review your credit report for accuracy (date opened, account balance, account limit, last activity) and have incorrect or erroneous information updated. |
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