Understanding Your Credit Score

Your credit score is essentially a number which should depict the creditworthiness of any given individual. Contrary to popular belief there is more than one credit score as each vendor will typically use their own calculation to arrive at your magic number. This mystical magical number may seem unimportant early in life but can have a large impact on you ability to buy a home, a car, get credit cards, or even get a job.

Your credit score is fluid, it changes as you history and your situation changes. What you got today may not be what you score tomorrow. This is especially true if you miss a payment or suddenly take on a large amount of debt. The most commonly used and commonly referenced score is the FICO score. The FICO score was created by Fair Isaac Corporation and measures key parts of your creditworthiness. FICO scores fall within the range of 300-850 with the higher your score the more creditworthy you are. A score of 720 or higher is pretty much going to get you the best rates on your loans.

Components of a FICO Score

Your Fico score consists of five major components which affect your net score to varying degrees.

Payment History (35%)

How you have paid on your debts in both the past and the present is the largest factor in determining your score. They don’t just take into account whether you were late or not this component consists of several factors like:

  • how long the payment was past due,
  • how often you were past due,
  • on how many accounts you were past due,
  • were their any liens of judgments against you, and
  • how long it has been since you were last delinquent (late).

Amounts Owed (30%)

Not only do they care about how you pay but they care about how much you owe. Factors they consider within this portion include:

  • Total number of accounts with balances,
  • proportion of available to used revolving credit lines,
  • proportion of original loan to owed amount on some installment loans, and
  • in some cases they may even consider a lack of a certain type of balance

Length of Credit History (15%)

While not as important as your payment history or the amounts you owe it is still seen as more important than the remaining factors. The longer your credit history the better you will be looked upon by the score gods. Keep in mind however that they also look at the amount of time since the last account activity so a dormant account may not be a huge help to you.

New Credit (10%)

This area is a little more obscure, here they take into consideration how many account you have recently opened,  the number of credit inquiries on your account, as well as the time since you had credit inquiries.

Types of Credit (10%)

The final category relates to the types of credit accounts you have on your report. Here is where they would take into consideration having only credit cards or having credit cards and a mortgage.

Where you can get your credit score

Your credit score doesn’t need a baby sitter, if you are practicing good solid financial management principals and you are paying or debts on time than you are going to end up with a decent score. If you have a high amount of outstanding debt than work to decrease the debt and don’t take on any new debt. If you aren’t looking to buy a house or get a loan than odds are this score is meaningless to you at any given time. The best thing you can do is to regularly check your credit reports to ensure the reports are accurate.  You can check your credit report by visiting annualcreditreport.com where you can obtain your credit report from each of the three major bureaus (see instructions here).

If you are still interested in finding out that magic number than you are going to have either opt in to receive it when you order your free report (they charge) or you could sign up for one the credit monitoring/score sites that are out there. Two of the biggest ones lately have been FreeCreditReport.com and TrueCredit. Just watch out for fees as these are usually monthly recurring costs.

This article is part of the Suburban Dollar Back to the Basics series. I plan to cover remedial personal finance topics which aren’t as sexy, or typically covered, in the personal finance blogosphere. My hope is for people to get a better understanding of basic personal finance without boring you to death, hopefully you will be able to share these posts with family and friends to get them into personal finance and have a good foundation of knowledge.

{ 2 comments… read them below or add one }

1 Ann-Marie August 27, 2009 at 11:16 am

Hi Kyle,

I just wanted to mention to your readers that you don’t ALWAYS have to pay for your credit score. There are a couple of sites out there that will give you a real credit score for free, including Quizzle.com.

I just came across a great chart on Wikipedia that compares “free” credit report websites. It clearly shows what you get, what’s actually free and what kind of trials you may have to sign up for to get your “freebies.”

Take care!

Reply

2 Kyle August 27, 2009 at 11:53 am

Thanks for the info, I will have to check out this Quizzle you speak of. Then again your score isn’t as important as making sure your report is accurate, the score will help you get better rates but you won’t see fraud on your credit in your score, it is in the report.

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