all about credit scores
What is a Credit Score?
It's important to remember the difference between a credit report and a credit score. A credit report is simply the history of your payments and the debts associated with you. However, a credit score (the most popular of which is the FICO score, generated by Fair Isaac) is a calculated index that more or less indicates your credit worthiness.
In the past, a credit score was used primarily by financial institutions for the purpose of extending credit. But other industries have started using the credit score as a means of determining if an individual is trustworthy.
You can now find a credit score being used by insurance companies, employers, and even some landlords. It has never been more important to maintain a good credit score.
What is a Good Credit Score?
The FICO credit score has a scale that ranges in values from 300 to 850. The higher your FICO score is, the better your chances are at getting credit approved with a reasonable interest rate. A score of 740 or more is generally considered an excellent score, and will usually qualify you for the best rates on a loan or credit card.
A credit score below 650 can lead to difficulty in finding lenders that are willing to extend credit. If you do qualify under these conditions, you should expect to be paying the highest interest rates and penalties, if they occur.
A small change in a credit score can have a significant impact on what credit will cost you. Of course, the closer you are to 650 or below, the greater the difference will be felt. For example, someone at 680 will get a better mortgage rate than someone at 659 or lower. This small difference in rate will cost you. It's easy for the difference in a mortgage rate to cost an additional $1,000 in interest a year or more.
How is a Credit Score Calculated?
Fair Isaac, the creators of the FICO score, does not divulge all of the information about how a credit score is calculated. Much of it is a trade secret, and they update the score monthly.
However, we do know the percentages of different financial criteria that are used in it calculations. 35% of a FICO score is based on an individual's payment history. This is why it is important to make payments on time and consistently. This is the largest factor in score calculation.
The next biggest factor in FICO score calculation is the amount you currently owe. Your current debts make up 30% of the score. This is why carrying a large debt load will negatively impact your credit score.
15% of your credit score is derived from the length of your credit history. An individual or company with a long credit history is going to find that it bolsters their score, and a relatively short one will have a negative impact.
Any new credit inquiries (credit pulls) are weighed in with an impact of 10%. A lot of credit inquiries, even for an established account, can bring down a credit score.
Finally, the different types of credit you currently have are considered, and this will contribute 10% to your final tally.
As you can see, there are many different factors that go into calculating a credit score. But over two-thirds of the total score is made up of only your payment history and current debt. These are the biggest factors affecting your credit score today.
How Can I Check My Credit Report and Credit Score?
You are allowed to check your credit report once a year for free from each of the major credit reporting agencies, Equifax®, Experian®, and TransUnion®. The easiest way to do this is to use the AnnualCreditReport.com site.
Many credit providers will offer a free service for checking your current FICO score. Using these services does not negatively impact your credit score, and is a great way to monitor how you are doing with yours.
Other sites, such as MyFICO and Credit Karma, offer free tools to monitor your credit score. These places usually provide other services as well, such as credit monitoring and score alerts.
Is Freezing My Credit a Good Idea?
It is estimated that 7% of US Households fall victim to identity theft each year, and the number continues to rise. When identity theft happens, it makes it possible for thieves to take out credit in your name, taking the loan funds and sticking you with the bill.
Luckily, it is possible to freeze your credit, thereby stopping any credit reports to be delivered to lending companies. This has the effect of stopping new credit being established in your name and it is used as a protective action.
In the case of identity theft, a credit freeze can stop new credit from being falsely assigned to you. A credit freeze is often free to identify theft victims, which shows how effective the process can be in stopping potential credit threats.
A credit freeze is a relatively inexpensive service to use, typically costing anywhere from three to ten dollars a month. The major downside to a credit freeze is that it will need to be thawed before any new credit can be established.
Today a credit freeze can be thawed in as little as 20 minutes, and it can be set to automatically refreeze on a selected date. This puts you in control of your credit.
One thing to note about a credit freeze is that thawing it only takes a successful login. This is why account information, such as account and password, should be protected and not stored with other financial information. The last thing you want is to give someone the keys to your credit freeze along with your financial data.
A good credit score is one of the most important tools you can have in today's financial world. Be sure to know your score, and check your free credit report each year to make sure that everything looks right. When it comes to financial needs, a good partner can make all the difference. Contact us today to see how we can help with your goals.