Money: Credit Score

Your Credit Score Breakdown

If you feel as though your credit score is some sort of mysterious secret, then you are not alone. While there is no verifiable statistic as to how many people feel this way, the fact that the credit reporting agencies don’t readily reveal their calculation methods makes easy to see why people are in the dark about it. You may not need to know the exact formula, but it’s still smart to have an understanding of how they come up with your credit score so you can whatever possible to maintain or improve your score.

After all, if you don’t know what goes into your credit score, there is no real way to do anything about it. Having a better idea of what elements go into determining it and how it’s calculated allows you to have more control over your financial health. With that in mind, here is a breakdown of what the credit score is made of.

1. The most important part of your credit score is based on your history of making payments. Believe it or not, this counts for a staggering 35% of your overall credit score. Now, if you have a spotless record of making payments on time, then this is actually good news. However, if you occasionally forget to pay a bill and are routinely a few days late, then this could be bad news. I say ‘could be’ because different creditors have different policies on when they will report a late payment to the credit agencies. However, you don’t know what that threshold is, so it’s best to pay all of your bills and loans on time.

2. Your blend of credit adds up to 10% of your score. Having a mortgage, car loan, credit card and perhaps a store account that you pay on is a sign to the agencies that you are able to handle a variety of credit options. Be sure that you are able to handle all of them, though, as not paying on time on even one type can count against you.

3. 15% of your credit score is determined by how long you have had a credit history. Of course, the better you have handled that credit over the years, the better it will be for your score. But it’s still better to have a more established credit record than a shorter one.

4. Second in weight to your payment history is the total amount you owe. This factor accounts for 30% of your score. The total amount you owe is compared to your income in what’s known as the “debt to income” ratio. The lower, the better. You should aim to keep your total debt at 25% or less of your annual income to have the best effect on your rating.

5. New inquiries into your credit are a warning sign that you may be overextending yourself and account for 10% of your total score. The one exception is if you are the one looking at your credit report.

As you can see, there is no real mystery when it comes to your credit score breakdown. Knowing how much weight is given to each portion of your score can help you decide where to first focus your efforts when you start trying to improve your credit score.


Average Credit Scores – How Do You Compare

Here’s a quick question: What is the average U.S. credit score? The answer is 690. So, how close did you get? If you were pretty far off, that’s okay. Before you can make an accurate guess, you need to know a few things. You need to have some idea of how the economy is doing. You also need to know what the full range of credit scores is.

On the first point, a declining economy can have a negative impact on credit scores. However, as of now the downturn in the economy has not had as much of an impact…yet. It’s possible that it could still affect credit scores, so it makes sense to do what you can to maintain or improve your score, in spite of a sluggish economy.

Now onto the range of credit scores. A perfect score is 850, and the worst possible score is 300. A bit of quick math tells us that the average of those two numbers is 575. That’s what the math tells us, but the national average credit score is 690. This is mostly due to the fact that no matter how tough things get, people still do their best to pay their bills, and pay them on time. Perhaps that can be attributed to the American spirit and the desire to keep one’s word. Whatever the reason, the actual average of 690 is significantly higher than 575.

More confusion is added by lenders who do not disclose what the cutoff point is for different terms of loans. Not to mention that these points can change at any time, and for a variety of reasons. For example, while you may have had an easy time getting a good loan with a credit rating of 680 (10 points below average) just three years ago, it would be very difficult to get those same terms today.

So what kind of score do you usually need to get the best terms today? Again, each lender is different, but overall you will need a credit score of 720 or better to make sure you will get the best terms. That’s quite a leap from 680, and 30 points above average. Lenders may have more stringent standards because the economy is affecting them as well, or it could be because they see everybody as a higher risk than they used to. Of course the reason doesn’t really matter if you can’t get the best terms for a loan, or if you can’t get a loan at all.

You should also know that each state has its own average credit score. This means lenders have different numbers to work with in each area. States where the average score is 700 or higher are Iowa, Minnesota, New Hampshire, Massachusetts, Vermont, Montana, North Dakota, and South Dakota. States with the lowest averages (around 660 to 670) are Louisiana, Texas, West Virginia, Georgia, Michigan, Alabama, North Carolina, Nevada, New Mexico, Alaska, and Arizona.


Keeping Tabs On Your Credit Score

There is no question that the current state of the economy could be better than it is. For that reason, it’s more important than ever to have your credit rating under control. If you think your score is too low, then you need to do something about it now. However, if you have tried to improve or correct your score in the past, you know it isn’t always the easy, quick or stress-free.

While a lot of people know they have a credit score, and some know exactly what their number is, what a lot of people don’t know is that there are three separate agencies that do credit reports. These companies are Experian, TransUnion and Equifax. To make things a little more more straightforward, each of these three agencies will often have different scores for you. The reason for this is that they don’t always collect the exact same information as not all creditors report to all three agencies.

As mentioned earlier, the economy is not in great shape and because of this lenders are setting higher standards before giving out loans. However, the better your credit score, the better your chance of getting a loan, and getting a loan with the best terms. Experian uses the Fair Issac scoring method, TransUnion uses what they call the Empirica score, and Equifax uses the Beacon score. So, when people talk about their credit score, they are referring to the number provided by one of these three companies. It is also possible to have a combined credit score which is the average of all three agency’s numbers. Regardless of the company, your credit score is nothing more than an attempt to objectively rank your creditworthiness.

As mentioned, part of the reason for the difference in each company’s score is that they don’t all get the exact same information. The chances of them having differing scores goes up as you have more creditors for them to get their information from (or not get it from). There is another aspect to the difference in scores, as well, and that is that they each have their own formula for calculating their scores. While this usually doesn’t make that much of a difference, it could have a negative impact if one of the three agencies has inaccurate information that lowers your score.

So, how do you get your credit score? There are a few basic ways, and it’s a good idea to do so before you get a loan so you know where you stand before going into it. If you want your Beacon score, then you can go to the Equifax website and pay to get it. You can follow the same basic process to get your report from the other credit reporting agencies, too. If you don’t want to pay to see your credit report, you can, by law, get a free report from all three agencies once a year at www.annualcreditreport.com.

Being able to actually see your full credit report from all three agencies gives you an opportunity to see if there are any mistakes or discrepancies on your report. If there are, you can send a correction to the agency. They will then place a note on your file, and update it if they can confirm that the information was inaccurate. Doing this puts the power of your financial future back where it belongs…in your hands.


Your Credit Score – Dos And Donts

Anybody who is financially aware has heard of a credit score and understands that it’s better to have a higher one as opposed to a lower one. Lenders, employers, landlords, and others may look at your credit score before deciding whether or not to continue doing business. Now that’s an important number! Think about it, if your credit score is too low you may not be able to get a loan, the job you want or live in the home of your choice.

Credit scores are determined using different criteria. It basically comes down to how much you earn, how much you owe and when you pay your bills. For example, if you are late paying your telephone bill, your phone carrier may report it to any combination of the three main credit reporting agencies (not all creditors report to the same agencies). When this happens, you will get a mark against you on your credit report. And this, in turn, has a negative impact on your creditworthiness.

However, there are other things that can count against you, such as:

Having too many credit accounts at any one time.
Closing accounts that have a remaining balance on them.
Too many open accounts, regardless of whether or not they have a balance.
Lack of a credit history.
Total outstanding debt that is too high.
Having bankruptcy on your record.
Not making payments on time.
Not enough of a credit history.
Having too much debt for your income (commonly referred to as the debt-to-income ratio).
Closing too many accounts within a short time frame.
Utility bills that go unpaid.

Each of the above things can raise a red flag on your credit report. How much any single one of these affects your credit score is hard to say, as each agency uses a different formula for calculating their score. At the very least, the things on the list don’t look good. The more things you are doing on the list, the worse your credit score will suffer.

Okay, now that we got the list of things to avoid out of the way, it’s time to get proactive. The good news is that there are things you can do that have a positive effect on your credit score. On top of that, they will also save you money in the long run and improve your overall state of financial health.

Only apply for credit when you need it, and do your best to space out when you apply for new credit accounts.
Buy things with cash instead of credit.
Stick to a budget so you don’t spend more than you earn.
Pay more than the minimum due on your credit cards.
Build up a savings account so you have money for emergencies.
Check your credit report for accuracy and make corrections where needed.
Pay all of your bills on time.
Correct errors on your report promptly.


What Your Credit Score Really Means

There are all kinds of questions surround the somewhat mysterious credit score. That mystery is created, in part, by the very agencies who determine the number. Formulas for figuring the scores are kept secret, and the numbers are not readily available; at least not without having to do some work to get them. People often want to know what exactly a credit score is, who is behind it, what things impact your rating and what effect a credit score can have on daily life. Add to that the tough economic times we’re now in, and your credit rating becomes more important than ever. Let’s take a deeper look at what a credit score is and how it affects you.

A credit score is nothing more than an attempt to rank your creditworthiness with an objective number. It used to be that if you wanted a loan you would go into the bank, and if you had a good standing in the community, or if the loan officer had a good feeling about you, you could get a loan. Obviously, there is a flaw in that system; anybody, no matter how well-respected, can be a bad credit risk. So, by calculating the effect of different factors on your ability to repay, the credit agencies came up with a way that seeks to treat everybody fairly.

There are several different things taken into account by the credit agencies when figuring out a score. The good news is that most of them are common sense. The one thing that makes up most of your score is your payment history. Therefore, one of the best things you can start doing (or continue doing) is pay all of your bills on time. Next, don’t owe too much. Your debt-to-income ratio should be at 25% or less. That means the amount you owe should not exceed 25% of your income. Don’t open too many accounts in a short period of time, and don’t close too many either. Only apply for a loan or credit if you really need it. As mentioned, most of these things are common sense and they will always go a long way towards improving your overall financial health.

Is a credit score really that important, after all, it’s only a number, right? Right, but it’s a pervasive number at that. The most well-known example are lenders. They will use your credit score to determine whether or not you get a loan, and if so, what terms you will get. However, your credit score is used by a lot more than just lenders. If you apply for a job, your potential employer may pull your credit report before making their hiring decision. Landlords use credit scores to see who they will rent to. Insurance companies use them as part of their risk assessment before offering you a policy.

There is no doubt that your credit score is important. Now that you have more information on what it’s all about, you can take steps to maintain or improve your score.


How To Get A Higher Credit Score

There are three major credit reporting agencies in the U.S., they are Experian, TransUnion and Equifax. Apart from collecting financial data on virtually everybody. Each of them also are responsible for generating a credit score. So, there is the full-blown credit report which lists all of your creditors, how often you pay, what you owe, and so on. This part of it can fill up page after page of data. Then there is the credit score. This is a single number that attempts to encapsulate the entire report into an objective score that applies equally to everybody.

When it comes right down to it, the three big credit agencies are responsible for the information that is shared with those who request access to your credit report. In turn, your creditors will use that information to decide what terms they will offer you. To put it bluntly, these credit score companies have a lot of power when it comes to American consumers. For this reason, it’s a good idea to do your best to maintain a good credit rating and fixing any errors on your report.

While it’s a serious thing, and can have a big impact on your life, it’s relatively easy to understand the basics of getting a good credit score. Here’s what you need to know:

The most important thing you can do for your credit score is to religiously pay all of your bills on time. As soon as you get credit or another loan, start making the payments right away. you may even want to make them a few days early to ensure they will be processed on time. You should pay the full balance of any bills that require it (such as telephone and utilities), and at least make the minimum payment on those bills that are intended to carry a balance. Pay as much over the minimum whenever possible. Your payment history accounts for the largest part of your credit score, so don’t take it lightly.

After making all of your payments on time, the next best thing to do is to spend less than you earn. This extends to not buying things that are too expensive. When making a purchase on credit, do not look at the monthly payment, but what the total cost to you will be. A common mistake is to see something you can’t afford, say a $5000 hot tub, then calculate the monthly payment. You may be thinking you can afford $200 a month, but not the $5000. Be careful! That $200 month is probably for 4 years, and that adds up to $9600! Surely, if you can’t afford a $5000 hot tub, you can’t afford to spend nearly twice as much on it. Living within your means will also keep your debt-to-income ratio lower, which is also good for your credit score.

The final thing you can do is get a copy of your credit report from each of the big three credit reporting agencies on a regular basis. Check for any errors and report them right away. If the agency finds you are correct, they will remove the mistake from your report. You have to check all three as not all creditors use all three agencies. Each one will have slightly differing records, and it’s best to be thorough.


What You Need To Know About Credit Score Agencies

There are three main credit score agencies in the USA, they are Experian, Equifax and TransUnion. These companies are the ones who gather, for all intents and purposes, the financial information on consumers. When you apply for a credit card or loan, they are notified; when you close an account, they are notified; when you are late with a payment, they are notified; and the list goes on. Basically any financial exchange of note that you participate in is noted by at least one of the big three credit reporting agencies.

Each agency may have slightly different information because some creditors only report to one or two agencies. However, some creditors report to all three, so it’s best to operate as though any negative activity you engage in will be picked up by all three agencies. Not that it will happen, but it should help to keep you on the right track.

You may be surprised to learn just how often your credit score can affect your life. The obvious example is getting a loan. If you don’t have good credit, you may not be able to get a loan. However, if you have just okay credit, you may be able to get a loan, but with less-than-ideal terms. Then we get into other cases where your credit score can affect you. Based on your credit report, employers may make their decision to hire you, landlords may not rent to you, your insurance rates could be set and utility companies may charge you a hefty deposit before connecting your services.

Because your financial well-being is so dependent on the credit score agencies, it’s a good idea to get a free copy of your report at least once a year. You can get your free report from each of the three agencies at www.annualcreditreport.com. Once you get your reports, go over them carefully and look for any errors or discrepancies. If you find any you should report them right away and add a note to your report. Errors on credit reports are more common than most people think, and it would be silly to lose out on a loan, job or place to live due to somebody else’s mistake.

There are other things you can do to keep your credit in check besides looking into your credit report. Paying all of your bills on time and in full (or at least the minimum amount due for credit cards) is the single biggest thing you can do to maintain or improve your current credit score. Do your best to pay down any outstanding debt you owe, as this will help your income to debt ratio. Finally, don’t overdo any unnecessary activity on your credit cards; this includes opening new accounts or closing old ones. Doing these things will prevent most of the potential red flags and help to keep your credit score higher. The key is to take a proactive approach to your own finances.


Is The Average American Credit Score Good Enough

With all of the talk about people facing financial difficulties, it’s no surprise that they want to know what the average American credit score is, and how they compare to it. There are many reasons for wanting to know the average and where you stand. If your credit score is lower, then you may want to work on bringing that number up before you try to get a loan. On the other hand, if it’s higher than average, you may want to get a loan right away, just in case your score were to go down. While it’s true that most people are familiar with the idea of a credit score, far too few really understand how it works.

The lowest possible credit score is 300 and a perfect score is 850. So, does that mean the average score is right in the middle of those two figures at 575? Common sense may lead a person to believe that’s the case, but 690 is the current average American credit score. However, with the economy suffering the way it has been, that average is set to be on a downward trend. The sad part is that your credit score could be headed in the same direction, unless you take the necessary steps to protect and improve it.

Now, the other main question about the average score of 690 is, “is it good enough?” In a word, no; at least if you want to receive the best available terms from lenders. The higher your score, the better the terms, generally speaking. So a score of 690 isn’t going top give you great terms, but it should, in most cases, be enough to get you a loan. However, you have to not only consider your monthly payment, but also how much you will spend over the life of the loan. Just a bump up of 10 points could shave off a fraction of a percent on your interest rate, which could translate into a huge savings.

One of the difficulties when it comes to credit scores is that every lender has different rules about who will or won’t get the best deals when taking out loans, and they do not publicly disclose what those rules are. The good news is that there is a pretty good rule of thumb that can help. If you have a score of 720 or higher, your odds of getting the best terms on most loans is quite high. As you can see, there is a gap between the average American credit score of 690 and the preferred score of 720. If at all possible, do what you can to get your score to 720 or higher before you try to get a loan.

Just to be sure we cover the other end of the spectrum, if you have a score of 620 or less, you will tend to get the worst terms available; assuming you can get a loan at all. While bumping up a score of 690 is optional, if your score is 620 or lower, it’s almost critical to get it to at least 690 if you can.

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