It's probably the most important number in your life. It's not your phone number, or your address, or even your social security. In fact, most guys don't even know this number. Yet, it virtually dictates our finances.
The number is your credit score, and here are some things you didn't know about that mysterious number that will help you improve your rating.
credit report basics
What makes up your score?Your FICO score consists of five categories:
It's up to the reporting agency as to how to weigh these factors. While you can't do anything about your history, you should keep these factors in mind when planning your finances in the future.
What is the FICO score and how does it affect you?
The FICO score (developed by Fair Isaac Corporation) is a number based on points assigned to each factor. The score affects whether you can 1) get credit and 2) pay for it. Scores range from 300 to 900, but most people fall between 500 and 700. The higher the score, the better.
credit report information
1. Almost anyone can check out your credit report
In most cases, only a potential employer needs to ask your permission. Otherwise, anyone with your identification details can take a look. So when you apply for an apartment, shop for a mortgage, or give anyone your details (date of birth, social security number, mother's maiden name), be advised that they can check your credit score.2. Not all credit reports work the same
There are three major reporting agencies, and each one has its own method of arriving at your score by weighing various factors differently. While the scores won't vary wildly, a few points here or there could mean the difference between being a no credit risk (over 700), or some credit risk (below 700). While that might not sound like much to you in the abstract, in reality it could mean paying several more percentage points for a loan. Or, if your score is below 600 (which puts you at the bottom of the range), you might not be able to get credit at all.3. Credit repair isn't a lock
While seeking help won't hurt your score, a lower monthly payment on an outstanding debt (say a credit card) can hurt if the lender decides to report the difference in reduction. On the other hand, the lender may report the bill paid in full as a reward to you for not defaulting. The point to remember is that repairing your credit has more to do with the discretion of the creditor than some magic fix.4. Credit reports are not always accurate
While your score is a subjective measure of your credit risk, the report must be a factual account of your credit history. The three major reporting agencies (TransUnion, Equifax, Experian) can and do make errors (by some estimates nearly a quarter of consumers could have been adversely affected by errors). You're entitled to one free report per agency, per year, and you have the right to dispute any mistakes. If you stay on top of your credit report and keep it free from errors, your credit score will be a true reflection of your credit worthiness.5. Paying on time will raise your score, but won't clean the slate
The more you pay your bills on time, the more you'll be rewarded. But six months of timely payments won't undo six years of default. Try and put yourself in the shoes of a creditor: Would you rather lend to a guy who just started paying his bills on time, or a guy who has always paid his bills on time? Obviously, one guy is a sure bet and the other guy is a risk. But remember; the sooner you start paying on time, the sooner your score will rise. Plus, credit agencies can and do weigh your recent track record separately, which means that if you show a significant improvement for six months to a year, you will get bonus points, so to speak.6. Too few and too many cards can hurt you
All of your credit lines come into your credit report and make up your credit score, regardless of whether or not you still use those lines of credit. The ideal position is to have a few lines of credit (never more than your income could pay) with a healthy gap between your balance and your credit limit. If you have an old credit line that you never use, cancel it. But don't put all of your credit on one massive line because from month to month, the difference between your limit and your balance might shrink to almost nothing, which will lower your score.7. Late payments hurt a good score more so than a bad one
If you have bad credit, a late payment is just another log on the fire, but if you have a good score (over 700), a late payment can really hurt you. That might sound unfair at first, but you have to remember that one factor can only raise or lower your score so much. Therefore, with each additional ding per factor (in this case tardy payments), you dissipate the effect of the ding. If you have a low score, that doesn't mean you shouldn't worry about it, but if the choice is between making a late credit card payment (again) and having your car repossessed, go ahead and pay late. If you have a strong credit score, but you're anticipating a major purchase, make sure that you don't miss any payments in the months prior.8. Credit scores are updated constantly
Your score can change with each new piece of information but, as a general rule, scores don't change more than 30 points (either way) in a single quarter. That said, a bad quarter shouldn't be an excuse for you to fall off the credit wagon. In other words, simply because there's a lag in reporting, doesn't mean that you should be complacent.9. Too many credit inquiries could hurt your score
A reporting agency can choose to weigh inquires against you (although they don't count for much). But only certain types of inquires (those made by you to a lender, not a reporting agency) count. Credit agencies used to rate all inquiries against your score, but times have changed and we live in a world that's much more dependent on credit. Although some confusion on this point does remain, you shouldn't let the fear that you might harm your credit dissuade you from checking your own score. If you want to minimize any dings that come from checking your credit, don't window-shop for a loan -- only get quotes when you need them.
10. Divorce does not automatically sever joint accounts
The divorce may be final, but you need to contact the reporting agencies and sever joint accounts right away, otherwise, your score can be damaged by her failure to pay on time. It would be nice to think that once the judge puts his stamp on the divorce decree, you're done. But the truth is, your financial battle has only just begun. Notify all reporting agencies in writing of the divorce and severance of joint accounts. Expect that errors can and will occur, that way you can catch them before any real damage is done.11. Credit repair companies promise more than they can deliver
Credit repair companies advertise a quick fix to your financial problems, but they shouldn't be taken at their word. Such companies send out dispute letters on your behalf, which temporarily take the negative item off your report while you have time to address the error. But if you can't prove the error (e.g. you really did miss all those payments on your credit card while in college), the negative item will be put back. A reputable credit repair company will help you negotiate with the creditor, and make sure that your credit report is rewarded because you cooperated and did not default on your debt.12. Bad credit does not disappear
It'd be great if bad credit could just go away. After all, the problem occurred years ago; why does it matter now? The truth is that the negative item will always be factored into your score. If you filed for bankruptcy, it will come off your credit report in seven or 10 years (depending on whether you filed chapter 13 or 7). But if you simply didn't pay, the creditor has the right to keep putting that item on the report for 21 years.13. Signs of stability will help your score
Living in the same place and keeping the same job for two years or more will help your credit score. Likewise, a respected profession (e.g. doctor, lawyer, accountant) may also help. After all, these signs of stability, no matter how subjective they may seem, do speak to your reputation, and ultimately your FICO score is a measure of that reputation. But don't worry if you haven't had the same job or lived in the same place for two years; living within your means and paying your bills on time are much more important factors.take care of your credit score
The fact of the matter is that you can probably never know enough about your FICO score. In today's world, it's more important than what you've got in the bank or how much money you make. But while you can control the factors that determine your score, you can't control the scoring agencies, which means that vigilance will be your No. 1 weapon.Make it a habit to check your credit report. Since there are three major agencies, you can do so three times a year, for free. Or, for a small fee, you can also get a three-in-one report, so you know exactly where you stand in one shot.
Resources:
http://www.nefe.org/news/news071205.html
http://www.bankrate.com/brm/news/credit-management/myths-reports.asp
http://en.wikipedia.org/wiki/Credit_report
http://www.equifax.com/
http://www.experian.com/consumer/credit_score_faqs.html#often
http://www.bankruptcyaction.com/questions.htm
http://www.fairisaac.com/Fairisaac/News/Press+Releases/Talk+America+Selects+Fair+Isaacs+TelAdaptive+Solution.htm http://www.transunion.com/index.jsp
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