Learn how to check your credit score

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What is a credit score and why is important?

Credit scores are numbers that quantifies the creditworthiness of a prospective or current borrower. These numbers are used to evaluate applications for credit, identify prospective borrowers, and manage existing credit accounts. Pretty much it’s a way for banks and credit card companies to determine if a person is likely to repay their debts. These numbers are represented and displayed in a credit record.

Who creates this credit record?

Credit reporting companies or credit bureaus gather information on an individual’s experiences with credit, leases, noncredit-related bills, money-related public records, and inquiries and compile it in a credit record. A credit
record generally includes five types of information:

  • identifying information such as the name of the individual, current and previous residential addresses, and social security number
  • detailed information reported by creditors (and some other entities, such as a medical establishment) on each current and past loan, lease, or non-credit related bill, each of which is referred to here as a credit account * Non-credit-related bills include items such as utility and medical bills.
  • information derived from money-related public records, such as records of bankruptcy, foreclosure, tax liens (local, state, or federal), garnishments, and other civil judgments, referred to here as public records
  • information reported by collection agencies on actions associated with credit accounts and noncredit-related bills, referred to here as collection agency accounts
  • identities of individuals or companies that request information from an individual’s credit record, the date of the inquiry, and an indication of whether the inquiry was by the consumer, for the review of an existing account, or to help the inquirer make a decision on a potential future account or relationship

What are the different types of credit scores?

There are different types of credit scores and it is hard to pinpoint a specific number, since, the possibilities are essentially endless. So here are just some of the main credit scores.

There are tons of credit reporting companies but most companies use only the three major credit bureaus, Equifax, Experian and TransUnion. Each of these credit bureaus have their own proprietary system. They don’t share information with each other, and the information on each bureaus’ reports may be different. Unique reports results in a unique credit score from each agency. Those scores account for three of the types of credit scores a person can have. All of the bureaus’ scores are based on two main scoring models VantageScore and FICO.

What is a FICO score and what are the different types?

FICO, also known as the Fair Isaac Corporation, is the most widely used scoring model. Based on the type on loan you are applying for there will be a different FICO score that is specific for that industry. The FICO Score, which has been around since 1956, is a single number that ranges from 300 to 850.

FICO began providing scores in 1989, and has updated its formulas over the years. Because of this different lenders maybe using different FICO Score versions, which adds to the types of credit scores. Some updates includes changes such as to include certain type of payment history or to reduce how negative impact a bill may have.

There are said to be 49 different FICO scores that each focus on a different lending requirement for a variety of financial providers in the United States. The six major FICO scores include the Generic FICO Score, FICO Mortgage Score, FICO Auto Score, FICO Bankcard Score, FICO Installment Loan SCORE and FICO Personal Finance Score.

The five largest factors that determine your FICO Score include:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

This may change if FICO updates to a new version, so be sure to always check your credit report.

What is a VantageScore?

VantageScore is a system created by Equifax, Experian, and TransUnion in 2006 as an alternative to the FICO Score. It has the same range as the FICO Score (300 to 850).

While both the FICO Score and VantageScore take payment history into consideration, the VantageScore places more emphasis on other factors such as credit age and utilization. The following factors are used to calculate your VantageScore:

  • Credit usage, available credit and existing balances (extremely influential)
  • Credit mix and experience (highly influential)
  • Payment history (moderately influential)
  • Age of credit history (less influential)

While these two, FICO and VantageScore are popular, lending companies may have a custom scoring system they use internally. For example, auto insurance and home insurance each have their own credit score that is used to calculate your premiums. A home insurance score will use information in your credit report but also take your home and neighborhood into consideration before giving you a premium amount.

What are the types of credit?

There are four common forms of credit or debt: Revolving Credit, Charge Cards, Installment Credit, Non-Installment or Service Credit.

  • Revolving Credit is a form of credit allows you to borrow money up to a certain amount. The lender sets a credit limit. In revolving credit, the borrower revolves the balance by rolling from month to month until it is paid in full. Interest charges typically occur for any revolving balance. As the money is paid back, the difference between the maximum credit limit and the current balance is available to be borrowed. Credit cards are considered unsecure credit because there is no collateral securing the amount borrowed.
    • Examples: This is the most common form of credit issued by credit cards, such as Visa, MasterCard, and store and gas cards.
  • Charge Cards is a form of credit that is different from revolving credit card. A charge card must be paid in full each month. If the balance is not paid on time and in full, penalty fees will be added. This form of credit is advantageous against accumulating credit card debt.
    • Examples: American Express is an example of a well-known charge card.
  • Installment credit is a set amount borrowed, a set monthly payment and a set timeframe of repayment. Interest charges are pre-determined and calculated into the set monthly payments. Common forms of installment credit is home mortgages and auto loans. Installment credit is usually secure.
    • Secure credit requires security for the lender. The borrower must provide collateral, something of value pledge in order to guarantee loan repayment. If the borrower fails to repay, or defaults on the loan, the lender may confiscate the collateral.
    • Examples: A home is collateral on a mortgage, and a motorcycle on an motorcycle loan. If the borrower were to default, the home or vehicle would be repossessed.
  • Non-Installment or Service Credit is a form of credit that allows the borrower to pay for a service, membership, etc. at a later date. Payment is usually due the month following the service, and unpaid balances will incur a fee, interest, and/or penalty charges. Continued non-payment will result in service cancellation and can be reported to the credit bureau, affecting your credit score. Service or non-installment agreements are very common in our everyday life.
    • Examples: Cell phone, gas and electricity, water and garbage

How to View Your Credit Scores

Get into the habit of pulling your credit report at least once a year. Take the time to comb through it and make sure that everything is correct.

Did you know that you can get a free credit report each year from each bureau? Yup. Just visit annualcreditreport.com and request copies. You’ll need to provide some personal information so they can verify your identity. Some bureaus provide credit scores for free directly on their website. Others may require a small fee. If you are in the market for a loan then it may be better to sign up for an account with each bureau. The other option is using one to get all, like Experian.

What to do if something is incorrect on your credit report?

If you notice any incorrect information, immediately write the credit reporting company or credit bureaus to let them know what information is accurate. Be very clear about what is wrong and why, and support your claims with whatever documents you can provide.

You can also contact the company that reported the information. This may prove to be a bit more difficult. Or you can also opt to use a credit repair service that will help you improve your credit score by getting rid of any errors and/or negative items on your reports for you. Be wary of some of these as they may take your money and not actually do anything. So weigh your options as to what is easier for you and your situation with dealing with errors on your credit report.

Understanding your credit score

After reading all of stuff regarding credit scores can be very overwhelming. Don’t fret though. The best thing you can do is keep simple with having a goal and a plan. The base for the plan should be to practice good credit behaviors which should include:

  • Always pay your bills on time before they are due. This will help to build good payment history with no late payments.
    • FICO Payment history (35%)
  • Check your total balance and work out a feasible and affordable payment if needed. If possible on higher balances, make multiple payments to pay it down faster.
    • FICO Amounts owed (30%)
  • Check to see how old accounts are, try to keep these accounts open. This will help to show you can repay your debts.
    • Length of credit history (15%)
  • Avoid getting new credit. If you plan on getting new credit, make sure to be prepared by checking and analyzing your credit first. Credit inquires can sometimes drop your credit score.
    • New credit (10%)
  • Pay attention to the types of credit you have like Revolving Credit, Charge Cards, Installment Credit, Non-Installment or Service Credit.
    • Credit mix (10%)
  • Lastly maintain a good credit utilization ratio. This is the amount of debt in relation to your overall credit limit.

What is credit utilization ratio?

Sometimes complicated right? Well to simply it, it’s how much you owe divided by your credit limit, usually shown as a percent. Different credit scoring models will consider this when calculating your credit score. The percentage amount of the credit score varies on the credit score model used.

A low credit utilization ratio is considered an indicator that you’re doing a good job of managing your credit responsibilities because you’re far from overspending. Although it is recommended to keep your total credit utilization below 30%, some even say 10%. While your credit utilization is generally a comparison of total credit used to total credit available, the amount of credit you’re using on individual cards is also important.

Credit utilization is based only on revolving credit, like credit cards or lines of credit. Installment loans such as mortgages or motorcycle loans are not included, but still affect your score in a different way using debt-to-income ratio.

Managing and improving your credit utilization is similar to the steps for practicing good credit behaviors. Here are some simple ways:

  • Pay on time and in full. If you can’t pay the full amount due pay as much as you can to keep the balance low. This will also help towards your FICO score Payment history which is 35%.
  • If you have a zero balance don’t close the account, leave it open. Remember your FICO score Length of credit history which is 15%.
  • Request a credit limit increase from a credit card issuer. This can help with your per-card credit utilization ratio.
  • Not necessarily a good idea for your overall score, but you could open a new credit account. Remember that credit inquires can sometimes drop your credit score and your FICO score New credit is 10% of your score.

What is debt-to-income ratio?

Debt-to-income ratio or DTI compares the total amount you owe every money to the total amount of money you earn. This is a factor when you are applying for credit along with your credit score. To get your DTI, add all of your recurring monthly debt payments, like mortgage, credit card and motorcycle. Next divide that number by your gross monthly income, the amount you make before anything like taxes, withholdings or expenses. Convert the to a percent and that’s your DTI.

Remember this number is not found in your credit report or credit score. This number is calculated by the lender when you apply for credit. This number shows if you can really afford and are able to repay a loan. If you make more than you owe, you will have a low DTI, making your odds better.

So what’s a good DTI ratio. Well it depends on what type of credit you are applying for, but most lenders generally prefer it to be below 35% and some below 28%. Now another layer gets added to this. There are two types of DTI … a Front-end and a Backend.

The Front-end DTI, which is used by most mortgage lenders, only examines how much of your gross income is used toward housing costs (mortgage payments, property taxes and homeowner’s insurance). The Back-end DTI takes into account all monthly debt payments which includes housing, credit cards, automobile loans, student loans and any other type of debt.

If you are using a a credit bureau like Experian it has a cool little calculator that will show you your DTI. Just remember that each type of loan will have different DTI requirements.

Managing and improving your debt-to-income ratio is similar to the steps for practicing good credit behaviors and your credit utilization. Here are some simple ways:

  • Reduce your total debt by paying on time and in full. If you can’t pay the full amount due pay as much as you can to keep the balance low. This will also help towards your FICO score Payment history which is 35%.
  • If you have a zero balance don’t close the account, leave it open. Remember your FICO score Length of credit history which is 15%.
  • Again avoid opening a new credit account. Remember that credit inquires can sometimes drop your credit score and your FICO score New credit is 10% of your score.
  • Increase your income by taking on a part-time job or finding a better paying job. Also consider getting paid for your weekend hobby, just don’t forget about Uncle Sam.
  • Complete a budget analysis. Look at what you spend every month including what might be considered miscellaneous items. Eliminate unnecessary spending and put that money towards paying down debt.
  • Lastly consider a debt consolidation plan. Consult with professionals about your options and be sure to ask how this will affect your overall credit.

Knowing what a credit score is and checking it is only the first steps. Your credit score reflects the information in your report and represents your financial stability. The next steps may be correcting errors, improving your score, preparing for a loan or just monitoring and protecting yourself. Whatever your next may be make sure you are prepared, do your research and find the right tools.


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