Check Your Credit Score. It Can Save You Thousands
Check your credit score
Your credit score is one of the most important numbers you will ever deal with. While many people understand that they have a credit score, they don’t really know how it is calculated. A credit score is used by many different companies to determine the credit worthiness of a person. Almost every business you deal with (utility companies, cell phone companies, insurance companies, landlords, lenders, and even probably your prospective employer at that job you recently applied for) is interested in your credit score.
How do I understand my credit score?
Your credit score (or credit rating) is a measure of how you have handled your finances, from information reported on your credit report: contact information, payment history, lawsuits, criminal record and convictions, bankruptcy filings… Nationwide consumer reporting agencies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment or renting a home.
The three major bureaus each determine your personal score based on a formula developed by the Fair Isaac Corporation. Each of them uses a slightly different term for their score. Equifax calls theirs “Beacon”, Experian calls theirs “Fair Isaac Risk Score”, and TransUnion calls theirs “Empirica.” Since most companies do not usually report account activity to all bureaus your credit score may vary depending on the agency that it is pulled from.
The rating system provides you with a credit score between 300 and 850 and the higher the score, the better. A higher score indicates that you’re a lower risk for a creditor, which translates into lower interest rates and easier access to all forms of credit. If you want to improve your score or maintain good credit you need to understand how credit scoring works.
Your credit score is made up of the following information:
Payment history: Your payment history makes up 35% of your total credit score. Your payment history considers whether you pay your bills on time or are late making payments. It will look at the frequency of late payments and how far behind you are on payments. How many accounts do you pay on time? Have you had major credit problems or filed for bankruptcy? Paying your bills on time each month will raise your credit score.
Outstanding debt: The amount you owe will determine 30% of your total credit score. This section looks at the total amount you owe and what types of accounts you have open. Do you have large balances on all of your accounts? How much available credit do you have in comparison to the amount you owe? How much have you paid down on your accounts since they were originally opened? Paying your accounts down responsibly and not having high balances on your credit cards can raise your score.
Length of credit history: The length of your credit history will result in 15% of your credit score. The longer your credit history, the higher you will fare in this particular department. How long you’ve had certain credit accounts open will affect your score, as well as how long it has been since you’ve used your accounts.
Inquiries & new credit accounts: 10% of your score is based on how many new credit accounts you’ve established. How many new accounts have you recently opened? How many requests for your credit have been made? How long ago where you shopping for credit? Rate shopping usually will not hurt your score if they are made within a short period of time.
Overall mix of credit: The final 10% of your credit score is based on the mix of credit you have — credit cards, installment loans, mortgage loans, secured loans, etc. The more balanced you are, the higher your overall score in this area will be. You want to have a mix of all types of credit.
What’s a good credit score?
To effectively evaluate your score you’ll need a range as well. Just as you would if you were taking a test in school, without a range (or scale), a score is meaningless.
Credit scores have a range between 300 and 850:
700 - 850 — Excellent or Very Good Credit. A credit score in this range with years of solid history indicates that the borrower will be granted the lowest rate on everything from credit cards to auto insurance and mortgages. Nothing but the very best for you!
680 - 699 — Good Credit. Although it’s not perfect, you should still be able to qualify for most loans and auto or rental leases, with only slighter interest rates compared to borrowers with excellent credit.
620 - 679 — Okay or Average Credit. Credit scores in this range are still considered “good” or “ok” by many creditors, though you may see further restrictions and fewer approvals when attempting to get a loan, lease, or a mortgage. Scores at this level are fairly common, and no reason for alarm. But it would be wise to evaluate your score and work to improve it. In this range, it is quite probable that you aren’t securing the lowest interest rates, and subsequently losing money as a result.
580 - 619 — Low Credit. Credit scores in this range are clearly below average, and you will have a difficult time securing a loan, or applying for a credit card. If you are able to secure financing, you’ll find higher interest rates for low credit scores. If your credit score falls in this range, you definitely need to evaluate your credit report and take measures to raise your credit score. Many consumers with credit scores in this range are considered “sub-prime” and may have to work with bad credit banks and lenders to secure financing.
500 - 580 — Poor Credit. Credit scores in this range are just flat out ugly. If you’ve got a credit score in this range, there’s a good chance you have a major derogatory mark on your credit report such as a collection, charge-off, mortgage lates, a foreclosure, or a bankruptcy. There is no question that your credit is in need of serious credit repair. At this level, you must evaluate your credit and act immediately to turn things around. You’re clearly paying higher interest rates and making credit mistakes that will impact your life for years to come.
300 - 499 — Bad Credit. Credit scores below 500 are the worst of the worst. To fall into this range, your credit report will definitely contain major derogatory marks, with very little positive data whatsoever. If your credit score is at this level, you may want to consider speaking with a professional about your situation. There’s a good chance you’ve got serious financial problems if your credit score is in this range.
Where can I get my credit score? Can I get a free credit score?
Since each of the credit bureaus calculates their own score, the truth is, you have 3 credit scores instead of one, and they can vary by as much as 50 points across your three scores. That can be the difference between getting a low interest rate and a high one the next time you finance a purchase. Also, if you’re planning a major purchase (such as a home or car), you need to check all three scores to help ensure you are able to negotiate the best rate.
One important distinction has to be made here. By law, you are entitled to one free credit report from each credit reporting agency once every 12 months. And yes, it’s really, totally, absolutely free, with no credit card number needed (some other sites claim to offer “free” credit reports, but only with the purchase of other products) You can request it online from the website annualcreditreport.com, call 1-877-322-8228, or fill out their request form and mail it to
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281.
The flip side is that those reports do NOT include your credit score. You do have the option of purchasing a score at the time of access though. Bottom line is, while you basically have access to 3 free credit reports a year, your credit score is never free. It can be advertised as free, but usually that means free, provided you buy such and such other product (usually a 3 in 1 credit report or some credit monitoring service).
If you want to purchase your credit report and/or credit score online, shop around first. The prices vary between the three credit bureaus. Here are the costs and contact information for ordering your own.
|
Credit Report And Credit Score, A Price Comparison |
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| Company |
Credit Report |
Credit Score |
Credit Report with Score |
3 in 1 Credit Report with score* |
| Equifax | $10.00 | only as an add-on | $15.95 | $39.95 |
| Experian | $9.95 | $5.95 | $15.00 | $39.95 |
| TransUnion | $10.00 | only as an add-on | $17.95 | $29.95 |
| MyFico.com | $15.95 | $47.95** | ||
| Pricing was accurate at time of posting and is subject to change. Visit the Web sites for a more complete description and pricing. | ||||
* Includes credit reports from all 3 credit bureaus plus your score from ONLY the bureau you’re ordering from
** Includes all 3 credit reports as well as all 3 scores. Transunion also offers all 3 scores as a $9.95 add-on to their 3 in 1 Credit Report
You might not be able to accurately calculate the effect of a low credit score but you will definitely be able to recognize the damage that it can do your life and to your finances, especially when it’s time for you to buy a house. Depending on where you live, there are websites you can use to check local mortgage rates (a good example is this website for Denver mortgage rates). Getting your financial house in order is the very first thing you need to do if you plan to finish rich. This post is the first of an ongoing Credit Education series where we will cover all credit related issue including (but not limited to) improving your credit, the cost of bad credit, identity theft, getting the best credit-related deals, refinancing credit, finding a legitimate credit repair company, and so on.
Until then, ponder this: “The FICO score is the single best summary score of one’s credit worthiness,” says E-Loan President and Chief Operating Officer Joe Kennedy.
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