Your credit score can affect your ability to obtain credit at reasonable terms. Therefore, it is important to know how to obtain your score and how it is calcuated.
A credit score is a numeric representation of how well you have managed credit in the past and how well you are likely to manage it in the future. It is derived from the information in your credit report. A growing number of creditors are using credit scores rather than credit reports to make decisions about consumers. For example, a creditor may check your credit score to help it decide whether to grant you the credit you’ve applied for, to determine what rate of interest to charge you, or whether it should change the terms of credit on an account you already have.
The main provider of credit scores is Fair Isaac and Company. Most of this country’s financial institutions as well as other major creditors such as credit card companies use its FICO score. However, Fair, Isaac has also developed special credit scoring software for each of the three national credit reporting agencies–Equifax, Experian and TransUnion. The Equifax score is called Beacon; the Experian score is the Experian/Fair Isaac Risk Model; and TransUnion’s credit score is called Emperica.
Your FICO score is likely to differ from your credit scores with each of the three national credit reporting agencies. Also, it’s apt to vary from credit reporting agency to agency. This is because each of them probably has different information about you in their files and weighs that information differently when they calculate your credit score. You should be familiar with all of your scores however since you have no idea which score a creditor will use to make a decision about you or whether the creditor will look at all four of your credit scores. You can purchase your credit scores at the Fair Isaac web site.
The higher your credit scores are, the better because creditors view consumers with low scores as high risks although different creditors have different perspectives about what is a low score and what is a high one. Your FICO score will range from 300-900. According to Fair Isaac, on a national basis only 11% of all consumers have a score of over 800, which is an excellent FICO score, and 47% of all consumers have scores between 650 and 799. Generally a score of 719 or higher is considered a good score and will get you a competitive interest rate.
When Fair Isaac calculates your FICO score, it places more importance on certain types of information in your credit record than others. The following percentages represent how it weighs each type of information. As you can see, your account payment information, the amount of debt you have, and the total amount of credit you have are the three factors that are most significant in determining your FICO score.
Your account payment history: 35%. (Your recent account payment history is most important.)
Your total amount of debt and the total amount of credit that is available to you: 30%. (If you have a lot of debt relative to your income and if you are close to your credit limit on any of your accounts, your credit score will be harmed.)
How long you have had credit: 15%. (The longer you have had credit the better, especially if you have had credit accounts with the same creditors for many years)
Types of credit: 10%. (A mix of different types of credit helps your credit score–installment loans, credit cards, a mortgage, etc. However, start applying for different types of credit to raise your credit score. Doing so could have the opposite effect.)
Amount of new credit you are applying for: 10%. (Generally, your credit score will be harmed if you apply for a lot of within a relatively short period of time. This is particularly true if you have a history of being late with your payments on your existing accounts, if your creditors closed any of your accounts and so on.)
Always check out your credit scores before you apply for new or additional credit. Follow this advice even if you just reviewed your scores a short time earlier because over time, your credit scores will change as information in your credit report is added or removed. If you discover that your scores have dropped a lot and you don’t believe that there is good reason for that to have happened, order a copy of your credit report from each of the three national credit reporting agencies, review them for problems, and challenge any negative information you may find that you think is incorrect.