Understanding Your Credit Report Score

Your credit report score (or Fico score) plays a huge role in your financial future but surprisingly, most consumers haven’t a clue what’s in their credit report or how their credit score is calculated even though every consumer has the right to request a free copy of their credit report annually from each of the three major credit reporting bureaus.

Your credit report contains all of the information being reported about you by your creditors and other financial institutions. The information on a credit report is then used to calculate your FICO credit score, created by the Fair Isaac Corporation as a way to help creditors objectively evaluate the risk of lending money to the public. Your credit score is used as a benchmark by lenders when making decisions to loan you money or extend a line of credit; the higher your credit score, the better credit risk you are considered to be. Fico scores range from 300 to 850.  The actual equation Fair Isaac uses to determine your score is a closely-guarded secret, but there are many factors that are known to influence your credit score.

While obtaining a copy of you credit report is absolutely free (via annualcreditreport.com), your credit score is not. You are given the option of purchasing your score from each of the bureaus at that point, but I recommend buying directly from Fair Isaac at myFico.com.  Your report, which you can receive electronically or through the mail, will detail exactly what creditors are saying about your.  If you missed a credit card payment, it will be on your credit report.  Missed a mortgage payment?  It will be there.  Paid all your bills on time?  That will show up, too. It will also include the names and addresses of your creditors, the amount of credit you have with them, the amount of money you owe, the type of loan you have, and the status of your loan.

How Your Credit Report Score (Fico Score) Is Calculated

A number of factors go into determining your credit score.  While the exact formula is a secret, here’s a general guideline.

Payment History (35%)

This includes the number of accounts you have that are being paid as agreed, any delinquent accounts, and any negative information and collections.

Outstanding Balances (30%)

This includes how much you owe on your open accounts, what time of credit lines you have, if you have over-extended credit limits, how much you still owe on installment loans versus the original balances, and how many of your accounts have a zero balance.

Length of Credit History (15%)

This includes the total amount of time your credit has been tracked, how long since your accounts were initially opened, and the last date of activity.

Types of Credit (10%)

This includes the number and types of accounts you have such as (installment loans, mortgage loans, and revolving accounts)

New Credit (10%)

This includes how many accounts you have opened recently and the ratio of new accounts to total accounts, the amount of recent credit inquiries, and the time elapsed since new accounts or inquiries,

Repairing Bad Credit

Those who have less-than-perfect credit can work to improve their scores and open the door to more financing options such as a lower mortgage interest rate or a better credit card. Some steps to improving your credit score include:

• Pay debts on time, every single month
• Keep your balances at or below 30% of your total credit limit
• Do not seek out new lines of credit
• Do not close old accounts, especially your longest-running accounts
• Correct any inaccurate information contained in your credit report (errors are surprisingly common)

Maintaining good credit is extremely important to your overall financial health. Those with good credit have better options for loans and have a better chance of getting approved for various types of financing. But maintaining your credit score is also very important for other reasons. Your credit score may also impact your insurance rates and your ability to get a job.  Borrowing wisely and repaying what you owe in a timely manner will get you far in life.