28 Jul

Your Credit Score Revealed

July 28, 2008

As many of you probably know, your credit score (or FICO score) can affect your finances in many ways.  But you may not know what determines your score and what it is used for.

Your FICO score is derived from a complex formula developed by Fair Isaac Corp.  It is reported by the three major credit agencies:  Equifax, Experian and TransUnion.  Your score can range from 300 to 850.  A score of 760 means that you are a good credit risk for lenders, while a score below 620 would put you at the lower end of the spectrum.

Your credit score is used by banks and credit card companies to determine if they will approve you for a loan or line of credit and what interest rate you will pay on those borrowed funds.  Your credit score may also be used to determine how much you pay for car insurance.  In addition, a prospective employer, especially those involved with finance, may perform a credit check prior to hiring you and a potential landlord may review the report prior to signing a lease (both situations require your written permission first).

Now that you know who is checking your credit report, how is your score determined?  The following five factors affect your credit score: payment history, ratio of debt to available credit, length of credit history, last application for credit, and types of credit you have.  Of these factors, two are the most important.  First, it is important to pay your bills on time as payment history accounts for approximately 35% of your score.  Secondly, a debt to credit ratio of 30% or under is ideal.  Lenders feel that if you are close to your credit limit, you may be at a greater risk of default.

Recent federal legislation has made it possible to get a free copy of your credit report every 12 months from each of the three credit bureaus.  It is important to check your report to see what lenders are basing their decisions on and to make sure there are no errors.  You can either get credit reports from all three agencies at the same time or spread them out throughout the year.  To obtain a copy of your free credit report, go to www.annualcreditreport.com.  Note:  there are many sites that offer “free” credit reports but require you to sign up for their paid credit monitoring services so make sure you use this exact address.

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