Charles J. Sloan
About your company.
About your company.
Life grants nothing to us mortals without hard work.
There are no secrets that time does not reveal. Jean Racine
The exact formula for calculating your credit score may be a secret. But the good news is that the top credit reporting companies have shared the most important factors that influence your final number. And that is all the information you need to get your score into the top range where lenders are begging for your business.
Who Makes My Score?
There are three major credit reporting companies in the United States: Equifax, Experian, and TransUnion. Your score at each of these companies may vary since all of the credit card companies, lenders, and other companies who have data on your creditworthiness may not report to all three of them.
In most cases, when people in the United States talk about a credit score, they mean the FICO score. This scoring method was developed by the Fair Isaac Corporation, and it takes into account your credit score with each of the three major credit bureaus. FICO claims to be used in 90% of all lending decisions. This isn’t surprising since with FICO, rather than having to look up three separate credit reports on you, lenders can save time by looking at a single number.
You may have heard about the VantageScore too. This is yet another hybrid credit score, which currently uses a score range of 300-850 (older versions had a different score range, so don’t let that confuse you). VantageScore was created in 2006 through a collaboration between Equifax, Experian, and TransUnion, as an alternative to the FICO. VantageScore says that what sets their score apart is the fact that they include consumers who otherwise might not have a credit score at all, such as people who don’t have a credit history, or those who use credit infrequently.
Use the 80/20 Principle to Your Advantage
I’m a big fan of the 80/20 principle. Basically, all it means is that 80% of your results will come from 20% of your efforts. So rather than bog you down talking about Equifax, Experian, TransUnion, FICO, and VantageScore separately, I’m going to focus primarily on your FICO score. Because if you’re doing everything right to raise your FICO score, your score with all of the others should go up as well. In fact, I’d be shocked if they didn’t 먹튀검증업체.
How Your Credit Score Is Calculated
So, back to FICO. You may have heard that there is more than one version of the FICO score, and that’s true. But the one which ranges from 300-850 is the most commonly used. And remember, if you are doing everything right, no matter what version of FICO is being used, your actions are highly likely to move your score in the right direction. FICO is careful to say that the importance of each factor may vary from person to person ? for example, someone who has a credit history only one year long will be judged differently than someone who has a history going back 20 years. But for most people, the five main categories of influence are weighted as follows:
30% of your credit score is based on the amount of debt you owe. In the case of credit card balances, even if you pay them off in full each month, credit agencies will typically use the amount owed on your last statement as the balance on your card. However, paying it off each month is still a smart move ? by paying it off in full each month, you avoid paying high interest rates and ensure that your balance doesn’t continue to grow higher and higher.
Your payment history is one of the most important factors in your credit score and counts for 35% of it. Lenders want to know if you have a habit of paying your debts on time, after all.
Better three hours too soon than a minute too late. William Shakespeare
Mind you, in Shakespeare’s time, I’m sure payments were made in person so three hours ahead would work just fine. With today’s online payments, I recommend you get into the habit of making your payments a few days in advance to be on the safe side and ensure that your payment clears by the due date.
10% of your score is based on how much new credit you have. With new credit, you haven’t had a chance to prove yourself yet in terms of paying it on time ? you’re an unknown, leaving lenders wondering, “Will he pay on time?” “Can she handle the burden of these new payments?” et cetera.
This new uncertainty is often reflected by a decrease in your credit score. But before too long, new credit becomes old credit and any potential hit to your credit score will decrease.
Length of Credit History
15% of your credit score is based on the length of your credit history. Think of it this way: If you’ve just met someone new, you probably don’t have enough history with them to form an accurate judgement of their character. Sure, you might think they seem like a nice person, but until you know them over the long-term, you can’t be sure if your initial impression of them is correct. Lenders and your credit history are kind of like that. The longer your history on your credit file, the more they feel they can trust that information to predict your future behavior.
Types of Credit in Use 10% of your credit score is based on what kinds of credit you tend to use. However, if you have what the industry commonly refers to as a “thin” credit file (i.e., you don’t have a lot of information in it), this factor may have more influence than it would for others. Generally speaking, it’s good to have experience with more than one type of credit. Here are the three major categories of credit:
Revolving accounts are things like credit cards and lines of credit ? your minimum monthly payment varies depending on how much credit you’ve used.
Installment accounts are things like car loans, mortgage loans, and student loans ? your monthly payment stays the same for a fixed period of time.
Open accounts include things like charge cards (different from a credit card) and utility accounts ? whatever amount is due must be paid off in full each month.
The ideal mix of account types will vary from person to person.
But What About Calculating The Other Credit Scores?
If you dig around, you’ll notice that Equifax, Experian, TransUnion, and Vantage Score may have slightly different percentage weightings compared to the FICO categories discussed above. However, the tips I give you in this book can help to raise your credit score regardless of who calculates it. So use that 80/20 principle to your advantage, and don’t let yourself get bogged down in small details that are unlikely to make much of a difference to your end result.
Worrying about the specific differences in credit score calculations is only necessary in rare cases (for example, if you need one specific credit bureau score to be high for a particular lender, and against all odds, your score didn’t increase enough by sticking to the 80/20 and implementing more general techniques).
What Is a Good Credit Score?
So you already know that the higher your credit score, the better, right? But how high is high enough? How low is too low? Let’s deal with that now, shall we?
Anything over 750 is considered excellent. You’re unlikely to find a lender or credit company who isn’t satisfied with a score like that. If your score is in this range, use the tips in this book to help keep it there. But don’t despair if your score isn’t at 750 yet. By implementing the strategies in this book, the odds are excellent that you’ll be able to increase your credit score to your ideal range, as long as you give it enough time.
700-749 is still considered to be very good ? it might not be good enough for the super-ultra-deluxe-lowest rates on offer, but you won’t get ripped off with punitive rates either.
620-699 is considered just fair.
Anything below 620 is thought of as bad, and you almost definitely won’t be offered the very best rates by lenders and credit companies, if you’re approved at all.
What Does NOT Affect Your Credit Score
In the United States, by law, your credit score cannot be based in any way on race, color, religion, national origin, sex, marital status, or the receipt of public assistance. The FICO score does not consider age, salary, employment history, or occupation. Nor does it take into account where you live, the interest rates you pay on your accounts, or child/family support obligations. Checking your own credit score does not affect it either.
Additionally, any inquiries made by lenders to pre-approve you for credit will not affect your score, as these are considered to be “promotional inquiries.” If your lender wishes to check your credit report in order to review your account with them, it is considered an “administrative inquiry” and will not affect your FICO score either. The same is true for any inquiries categorized as coming from employers.
Last, but not least, FICO does not consider whether or not you are taking part in credit counseling.
Credit Score versus Credit Report: Know the Difference!
These sound similar, but are completely different. If you already know the difference, feel free to skip ahead, but if you’re unsure, then read on!
Your Credit Score
Ok, so your credit score is just a number, usually between 300 and 850, and is calculated based on the contents of your credit report. As you know, FICO is the most widely used scoring system in the United States, but Vantage Scores can also be used. In addition, some banks calculate their own version of your credit score for private use behind the scenes.
Your Credit Report
our credit report does not usually have a number at all, but it does contain all the details that your credit score is based on. As you know, the three main credit reporting agencies that maintain credit reports on you are Equifax, Experian, and TransUnion. Creditors are not required to report information to all of them, so your credit report may be different at each one. Your credit report typically includes:
Who Is Checking Your Credit Report and Score?
Your credit score may be accessed by these groups:
You’ve learned who calculates your score, and the most important factors that they consider (and just as importantly, you now know what does not influence your score!). You’ve also learned what constitutes a good score, the difference between a credit report and credit score, and who might be checking up on you.
But before you take steps to raise your credit score, it’s important that you arm yourself with information on some of the most common credit score myths.