Your FICO credit score can make or break things in your life that have nothing to do with banking.
Most of us know that without a good credit score, it is difficult to obtain credit or financing. Things like mortgages, car loans, personal loans and credit cards are all contingent on your FICO score. In addition, a low score exposes us to bad credit products with high-interest rates. Even worse, FICO scores are now actually being used to vouch for a person?s character. This pretty much sucks.
Your FICO scores can be a deciding factor in the insurance rates you get and whether or not you can rent an apartment. It can even impact your employment opportunities. There is a lot of power in your FICO score. It has become increasingly more important to completely understand your score and learn what you can do to improve it.
FICO – What is it?
A FICO score is a 3 digit number calculated from the information on your credit report at a particular time. FICO scores generally range from 300-850. The higher the number, the better the credit score.?While there are many different types of credit scores and credit reporting agencies in existence, every US consumer typically has three credit reports from the three main credit reporting agencies: ?
Don’t let the title “agency” fool you. All three of these agencies are private companies. They aren’t affiliated with the government. They make money by collecting information about you and selling reams of information to banks. Lenders, retailers, financing companies, landlords, utility companies, courts, the IRS, collection agencies etc. report information about consumers to these agencies for free. The agencies then sell consumer information back to financial institutions. They hold a lot of information in an age when information is power. And recently they haven’t held it well.
Credit reporting “agencies” even try to sell your own information back to you.
FICO scores were the brainchild of Fair Isaac Corporation who invented the math and analytics used for the data crunch. But Fair Isaac Corporation can’t guarantee that the information collected and used by the three main credit reporting agencies is correct. They simply provide the analytics. In fact, none of the three credit reporting agencies can guarantee that the information is correct either. They just collect it and sell it.?Only you can make sure the information they have collected is correct and belongs on your reports.
Your FICO Score is not static – it changes all the time.
Your FICO score from each of these agencies can differ because the scores are based on the information each agency has on its credit report for you at the time a request for your score is made. It’s a screenshot of your credit report. In addition, lenders might not report to all three agencies. So your score could vary between agencies. And even if all agencies had the same data, they compile their data at different times. You really need all three of your reports to quality check all of your information.
What is a good FICO Score?
To give you an idea of the general score ranges, it’s sort of broken down like this:
|Top 20% of US consumers -?Exceptional|
740 – 799
|Above average score of US consumers -?Dependable|
670 – 749
|Average score of US consumers -?Good|
580 – 669
|Below average score of US consumers – Iffy?|
|Lowest 20% of US consumers -?Risky|
What?s in my FICO Score?
The FICO Score is calculated by math and analytics which evaluate the information in your credit report at the time the request is made. It is a snapshot in time. The FICO Score takes into consideration 5 main categories of information in your credit report when a request for your score is made.
1. Payment History 35%
This is a huge chunk of your score which not only includes your payment history on credit lines, but also a bunch of other stuff. In general, your payment history covers:
- Credit cards
- Retail credit
- Finance company accounts
- Any reported information on the delinquency of payments to anyone who reports it
This history also includes:
- The number of accounts paid as agreed
- Late payments
- Missed payments
- Wage attachments
- Judgments from lawsuits
2. Amounts Owed 30%
This score reflects the total amounts owed on all your debts. It also takes into account the ratio of debt to credit available.
For example, if you are carrying a balance of $1,000 on a card with a $2,000, your credit utilization ratio is 50%. That’s not good because the ratio is above 30%.
Anything over 30% credit utilization can impact your credit score.
3. Length of Credit History 15%
In general, the longer your credit history, the higher your score. However, length of credit history also takes into consideration:
- An average of your oldest and newest accounts
- The age of certain accounts
- The amount of time since you used certain accounts
4. New Credit 10%
This score looks at your recent credit activity including:
- New accounts opened
- How long since you opened your?latest account
- How many recent requests for credit you have made
- How long since credit report inquiries were made by lenders
- Whether you have good recent payment history following any past problems
5. Types of Credit in Use 10%
This score looks at what kinds of credit you have or have had in the past. There are a lot of variables here. Having a bunch of different types of credit isn?t necessarily good or bad. The score is relative to your particular situation.
- What kinds of credit accounts you have (credit cards, loans, mortgage etc.)
- How many accounts of each type you have
FICO – How can I raise my score?
1. Payment History 35%
A huge chunk of your score is based on making payments on time and as agreed. This is sort of a no-brainer but did you also know that not paying utilities and rent on time can affect your score??
The thing is, we never know who is going to report information on us.
Although we don?t get brownie points for paying our electric bill on time, if we get behind it can get noticed. Another thing to look out for is taxes. If the IRS files a lien on taxes, it can remain on your report for 7 years.
- Make payments on time – Set your payments up automatically so that this is a no-brainer.
- Pay utilities on time – If you fall behind on utility bills it can affect your FICO score.
- Pay rent on time – If reported, late rent payments may affect your score.
- Pay your taxes on time – If the IRS files a tax lien, it can impact your credit score for 7 years.
Public Record and Collection Items 7-10 years
Information on overdue debts from collection agencies and public records can stay on your credit report for 7-10 years:
Even though these things can stay on your report for 7-10 years, their effect on your actual score lessens over time. So if you do have an ugly mark on your report, just keep moving forward and creating new good payment history to dilute the effect of the old.
2. Amounts Owed (30%)
The obvious way to increase this score is to pay down your balances. However, if this isn?t possible, you may be able to change your credit utilization ratio by moving things around a bit. The general recommendation is a credit utilization ratio of 30% or below.
So, if you are carrying a balance of $1000 on a card with a $2000, your credit utilization ratio is 50%. Not so good. By opening another credit card with the same limit and moving half of your balance to it, you can lower your credit utilization score to 25%, which is good.
How much you owe compared to how much credit is available to you makes a big difference.
- Spread balances out over several cards – If you have one credit card that is maxed out, your credit utilization ratio is 100%. Not good. Better to have two or three cards carrying a partial balance which increases your credit limit and lowers your credit utilization score.
- Don?t close unused cards – Having more credit available increases your credit line which lowers your credit utilization ratio.
- Be aware of lender’s reporting dates -?Even if you pay off your credit cards in full every month, your lender may report information to credit bureaus before you make your payment which could give an inaccurate picture of your overall credit utilization score. Remember that when a credit score is requested, it’s just a snapshot in time. If you need a good credit score for an upcoming purchase, be aware of this.
3. Length of Credit History 15%
We can?t go back in time and change our credit history, but we can change the length of time we have a credit history going forward by keeping old accounts open and using them from time to time. If you have a credit card that you?ve had for awhile and are thinking about closing, think again. Using this card for small purchases once in awhile and paying it off monthly will positively affect both your Payment History and your Credit History. In short:
- Don?t close unused cards
- Use older cards now and again and pay them off monthly
4. New Credit 10%
This is a tricky category. When we are looking for a new credit card, personal loan, or mortgage, we shop around. Each time we apply, we authorize the lender to receive a copy of our credit report. These requests show up on our credit report and remain for 2 years. These hard inquiries can cause our score to dip. But not all inquiries are equal. For example, if you are looking for a mortgage or installment loan, 5 inquiries in one week may only count as 1 inquiry. It?s understood that in order to compare rates you need to apply for different loans. So there is some leniency here.
But credit cards are different. You need to be careful here. Several hard inquiries for credit cards in a short period of time make you appear as if you are a risky borrower. When applying for credit cards, do your research first and apply for as few as possible. Then wait at least 6 months to one year before applying again. ?
- Avoid applying for multiple credit cards in a short period of time.
Is the information on your credit reports correct?
So, to recap, we?ve got three different credit reports from three different agencies that may or may not have the same information. Also, financial institutions may not report your information to all three credit reporting agencies. In addition, they may report your information in different ways. And this is why it is critical that you review your reports periodically to confirm that the information is correct. If it isn?t correct, you can dispute it and have it removed.
In addition to credit information, the credit agencies collect personal information:
- Date of birth
- Social Security number
- Employment information
Make sure that the personal information on your report is yours.
You may have applied for credit or to rent a place under a different name in the past. This can show up resulting in incomplete or even inaccurate information about you in the present. Also, there may be a variety of misspellings in your report from previous lenders. The credit agencies keep these on the report to maintain the link between you and the credit information. While this alone won?t hurt you, you need to make sure that this information belongs to you and not someone else. Marriages, divorces, sharing an address with relatives and other personal changes can also mix things up a bit and open a door for mistakes and erroneous information.?
Don’t forget, the way that information gets to credit reporting agencies is through humans, and humans make errors.
Reports of incorrect information show up all the time. Even FICO admits that errors can appear on your report in the following ways:
- You applied for credit under different names
- Someone made a clerical error in reading or entering a name or address information from a hand-written application.
- You gave an inaccurate Social Security Number or the number was misread by the lender.
- Loan or credit card information was inadvertently applied to the wrong account.
And then there is identity theft. The Equifax breach in which?143 million American had their data stolen last year should be a poster child for enticing you to want to make sure that you haven’t been affected. Not to mention the multiple ways our data can get stolen online. If you haven’t checked your credit score lately, how would you know?
How to Take Action
So far, it seems like the whole FICO thing is one-sided. Consumers have no say in what gets reported or how accurate the information is. Enter the Fair Credit Reporting Act (FCRA.) Any business that reports information about consumers to consumer reporting agencies has legal obligations under the Fair Credit Reporting Act’s Furnisher Rules. In short, businesses must:
- Provide information that is complete and accurate.
- Investigate consumer disputes about the accuracy of the information they provide.
1. Get your REAL credit report
As consumers, we have no power over #1, but we can certainly do something about #2.?The FCRA allows consumers one free credit report from each of the three credit reporting agencies once per year.?There is only one source authorized under federal law that can provide you with a free report from each of the three agencies each year and it is this:
What about all of those other websites that claim to offer free credit reports?
Because of consumer abuses in the past, i.e. using ?free credit report? to lure consumers into a paid service, the FTC takes this very seriously. In fact, they require the following notice to appear on every website that claims to offer ?free credit reports? because there are always strings attached, especially with Experian, Transunion, and Equifax – they make money by selling your information, remember?
You can also receive free copies of your credit reports if you qualify under the following circumstances:
- You have been denied credit, insurance or employment in the past 60 days as a result of your report.
- You state in writing that you are unemployed and intend to apply for employment within 60 days.
- You are a recipient of public welfare assistance.
- You have reason to believe that your file at the agency has fraudulent information.
That being said, if you feel you need to buy a copy of your credit report from a credit reporting agency, you can:
To buy a copy of your report, contact:
- Experian: 1-888-397-3742;?experian.com
- TransUnion: 1-800-916-8800;?transunion.com
So be careful. Don?t give your credit card info to any website that claims it can give you a ?free credit report.? Most likely there?s some small print somewhere advising you that you will be billed monthly after a period of time, or they may try to upsell you on additional services.
“Free credit score” does not equal “free credit report.”
More recently, credit card companies and other financial sites will provide you with “free credit scores.” Keep in mind that a “free credit score” is not the same as a “free credit report.”? This can be confusing. In order to truly understand how your score is determined and whether the information is accurate, you need copies of your full credit reports.
2. Put some thought into when you order your free credit reports.
Because the information reported on us is constantly updated, some financial advisors suggest that you stagger your requests from each of the three agencies throughout the year. For example, if you order one report from a different agency every four months, you can get insights of what?s on your reports more frequently for free. That being said, if you are considering a mortgage, car loan or any other type of big financing move, it may be in your best interest to order them all at once because you will not know which credit reporting agency the lenders you apply to use.
Once you have your reports, review them to make sure they are accurate. The Consumer Financial Bureau has some tips on common errors to look out for on this page. But Nolo law does a much more thorough job on their?page.?If you find errors, The Consumer Financial Bureau also has some instructions on how to dispute them on this page. Again, Nolo chimes in on this as well here.
It sucks that we have to do this, right?
Our financial system may be totally nuts, but we are stuck with it for the meantime. Having a decent FICO score has become more than just an advantage for purchasing power. It has become a testament to our character. Although this sucks, there isn?t much we can do about it except attack it and try to control what we can. The reporting agencies can’t confirm if your information is correct. FICO can’t confirm if your?information is correct. Only you can confirm if the information these agencies have on file for you is correct. As FICO says, albeit, rather flippantly:
“Perhaps the greatest thing about your FICO? Score is that you can change it ? in fact, only you can change it.” – FICO
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