Credit Score Basics

What to know about this mysterious number

By ERIC PETERS

Posted: 2006-08-18 19:21:39

In the olden days, if the store manager didn't like your face, the price of your lay-away might mysteriously go up. Today, you can be as good-looking as Brad Pitt and still pay through the nose for a new car loan -- if you happen to have an ugly credit score.

Credit scores are a form of financial profiling lenders use to predict the statistical likelihood of a buyer not keeping up with his payments -- or going bankrupt altogether.

They are based on things like your income, employment history, length of time at your residence, buying patterns, history of credit applications, repayment of loans, revolving debt (credit card balances, etc.), record of defaults, bankruptcy proceedings and so on.

All this data is monitored and recorded by the three major credit reporting bureaus -- Equifax, Trans Union and Experian. The info is fed into a mathematical equation developed by the finance/lending industry to assign you a "risk profile" relative to past experience with people who have similar records of income, debt payment and so on. All this is ultimately reflected as a number ranging from 300 on the "homeless and hopeless" end of things to 800 (perfect credit) on the other.

The higher your score, the better your credit -- and the lower your interest rate should be.

Check Your FREE Credit Report Here

Here's how it breaks down:

About 35 percent of your credit score is derived from your payment history -- how well (or not) you keep up with your current obligations. Any record of late/missed payments, etc. will negatively affect your score -- even if it happened several years in the past and you've had no incidents since that time. (Credit records typically go back seven years.)

Another 30 percent of your score is based on the amount of money you owe to various lenders -- everything from your monthly mortgage payment to outstanding credit card balances. If the proportion of your debt relative to your income is too high, your score will be lower.

15 percent of your score is based on the length of your credit history -- the more established you are, the better your credit score will generally be.

10 percent of your score is based on recently applied-for/new credit applications -- the more such applications, the more it hurts your score.

10 percent is based on the types of credit you have and are using -- is it a "healthy mix"? (Excess revolving/credit card debt is "unhealthy," as an example.)

Your credit score will also change from year to year as new information about your income, current spending patterns, recent payment history and so on are factored into the mix.

Basically, if you don't spend more than you can repay -- and your record shows a steady track of responsible conduct with money matters -- you should have no trouble getting loans at favorable rates.

It seems pretty straightforward -- and for the most part, it is. However, there are some things to be aware of that may have nothing to do with how well you manage your finances as such. People who are very conscientious with their money are sometimes surprised to discover their credit's not as good as they might have imagined. And folks who assume their number's got to be really low based on their high debt load may have higher-than-expected credit scores.

Here's why:

Absence of payment history -- Some people think it's smart to avoid credit card and other debt entirely, preferring to pay for things as they go with checks or cash in order to avoid living beyond their means. This is prudent in terms of keeping within one's limits -- but as far as your credit score goes, it leaves a black hole on your record that can be just as lethal as having too many cards or getting in over your head with debt. The problem is that without a paper trail, no one really knows how good -- or bad -- a risk you really are. Having a Visa or Mastercard creates that paper trail for you. It also shows that you can handle credit -- and that's ultimately what it's all about. This is especially important for young people just entering the work force.

Too many cards -- Even if you never carry a balance (or always make your minimum monthly payment) having too many credit cards can hurt your credit score as badly as having too few (or no) credit cards at all. The assumption is that with access to all those potential lines of credit, you might over-spend yourself into the poorhouse without realizing it until it's too late. It's easy to fall into the trap of having too many cards given the weekly deluge of offers most of us get in the mail each week -- but to keep your credit score healthy, avoid having more than 3-4 credit cards in your wallet.

Too many credit inquiries -- If you're thinking about a car (or other loan) avoid applying for new store cards, a home equity line or other forms of credit during the weeks/months prior to applying for your loan. Each time an inquiry is made into your credit history during the application process, it is reported -- and that can negatively affect your overall credit score. Again, the assumption (as far as the credit equations go) is that you're too extended, or in danger of becoming over-extended.

Finally, everyone should periodically check their credit report for accuracy -- and immediately contest any erroneous information that may have found its way onto your record.

Contact info for the three major credit bureaus is as follows:

Equifax (www.equifax.com or call 800-685-1111)
Trans Union (www.transunion.com or call 800-888-4213)
Experian (www.experian.comor call 888-397-3742)

Check Your FREE Credit Report Here

2006-08-18 19:01:12

Must Read?

92 %

8 %

33 VOTES

Recent Comments

Post Your Own

1 - 10 of 35

35 comments

Eugeneriggs 08:49:01 PM May 07 2008

Report This!

I recently had a law suit file against me for keeping a rental deposit after someone trashed my weekly vacation rental. The small claims case took place out the the state that the rental was in and it is and was an illegal suit and if was place in my file and dropped my credit score. The Credit bureaus have no idea what they are doing. Now I am suing to get it removed and suing for much more. The law and the credit bureau's just do not make sense, where is the justice.

Eugeneriggs 08:43:40 PM May 07 2008

Report This!

When I was in banking we used our heads and not a stupid score. We made good loans and for the most part we were always repaid. Now people who deserve credit can't get it when they should and if they do they get zapped with a very unfair rate that even makes harder for them to pay. What's up with that. You talk about stupid!

Eugeneriggs 08:40:52 PM May 07 2008

Report This!

Credit scores for the most part should be outlawed. People who have always made their payments and never filed bankruptcy are not getting treated fairly. People who file bankruptcy can go right back out and barrow. Go figure. The Credit system sucks.

Celmww 07:03:55 PM May 05 2008

Report This!

In my opinion,this is one huge issue that is being neglected. One issue that affects all of our monthly bills..People work harder and harder and wonders how they still can't keep up with expenses. These bureaus are the reason, your score fluctuates depending on what's on your credit report, and because most people are busy working to earn a living, we can't keep up with the changes, yet we are paying the price - credit card interest automatically goes up..and so on. It's time to raise awareness on this issue, a lot of hardworking people are continually being ripped off by credit companies.

Celmww 06:40:59 PM May 05 2008

Report This!

Re: myownmadmnd's ?
From what I know, since these bureaus started, our loan interest rates, loan approvals, insurance rates, employments..have been totally manipulated through scores that they come up with. They don't inform you if a negative/additional changes occured in your credit report unless you subscribe monthly. Again, disputing an error takes a lot of time money and effort until most people give up! if you don't have many credit accounts/loans because you spend what you can afford - your score is low, therefore you would be paying higher interest on auto insurance. You tell me if that is RIGHT!

ALittLE1 12:10:14 AM May 01 2008

Report This!

I paid my 6.5% interest rate balance on my home mortgage by accepting a balance transfer from a credit card offer of 3.99% until it's paid. I found out later that this had a negative impact on my credit score because it is now revolving credit. This seems a little unfair or strange to me as we no longer have a home mortgage. Neither of the 3 credit bureaus take this into consideration when my score is calculated.

MinouxFive 08:23:21 AM Apr 27 2008

Report This!

The credit companies who send you a copy of your credit history should tell you up front that you are not going to get your fica score, many people just want this number. I just learnrd this from the comments and I think this is wrong, even the score was only valid at the time of the report, I would accept that.

MyOwnMadMnd 01:55:01 PM Apr 26 2008

Report This!

How did these credit companies get started in the first place? I mean, who started them, and how is it allowed that some company that I don't understand can have all my personal information, and then I have to BUY it from them. Can someone explain??

Spikientx 01:20:07 PM Apr 26 2008

Report This!

For the life of me I can't understand WHY the credit agencies will let ANYONE put a negitive report on you when you do NOT even owe the money!
I tried to explain that I didn't owe this money to a company and all I got was"it was verified that is you"- -NOW, I have to take this to court because they won't take it off- -fair? Hell no!

JdyNDaSkys 11:25:56 AM Apr 26 2008

Report This!

For those who don't know: It's true that you can get a free copy of your credit report every year from each of the 3 major credit reporting agencies BUT, you only get your credit report, not your credit score. If you want the score you have to pay for it. The cost of getting it varies, depending on which company you're going through to get it, and there are many of them out there. Some of them have strings attached so, be careful about which one you choose. You'll sometimes also get your score if you have a credit application turned down. It could be included in the letter of decline sent to you by the company that's refused to extend you credit but that doesn't always happen.

1 - 10 of 35

35 comments