What is a Credit Score?
What is a Credit Score?
There should never be any surprises on your credit report. That's why it is important to always keep a close eye on your report, pulling it at least annually, if not 2-3 times per year. Another important number to watch is your credit score. Although the number doesn’t define who you are as a person, it is important to have a strong credit score. The most important reason for a strong score is it saves you money. And who doesn’t want to save money? People who have a higher score are generally approved for lower interest rates and fees on loans. The same applies to credit cards.
Having a strong credit score can also help when you apply for a job or move into a new apartment. And now, some insurance companies even use your score to offer better monthly rates.
What Makes Up a Credit Score?
FICO (Fair Isaac Company) is the most commonly used credit scoring system (see pie chart on right). FICO scores range anywhere from 300 to 850 and the higher the score, the better off you are. Typically, lenders, landlords and potential employers see 700 and higher as a strong score.
There are five major factors that make up a credit score: payment history (paying on time), outstanding debt (are you maxed-out?), length of credit history (how long accounts have been open), new credit (how many inquiries or new accounts), and types of credit you carry. A strong credit score generally has a variety of accounts, which could include student loans, a credit card or two, and a mortgage payment or car loan.
Each factor accounts for a certain percentage of your FICO score: payment history is 35%, outstanding debt is 30%, length of credit history is 15%, new credit is 10%, and types of credit is the last 10%. The best way to assure a strong score is to make regular monthly payments, and establish a solid pay pattern. Also, deal with any accounts that may reflect negatively on your credit report, like collection accounts or charged-off debts. It’s better for your score to handle a debt and pay it in full versus settling an account.
Where to Get Your Credit Report
Although certain places advertise free credit reports, what they don’t tell you is you will have to pay for your credit score if you want it. The reports may be free, but a credit score always costs something. Less reputable sites may also try to sell one of their products like credit protection in exchange for getting your “free” report.
All consumers are entitled to a free copy of their credit report once a year, or if they are denied credit. One of the best websites for pulling your credit report is AnnualCreditReport.com. Using AnnualCreditReport, consumers are able to pull their reports from all three of the major reporting bureaus. You can pull your credit reports all at once or one-at-a-time throughout a calendar year to keep an eye on your credit. Visit our resources section to learn more about strategies for maintaining and improving your credit score.
Please Remember This One Thing! All consumers are entitled to a free copy of their credit report once a year, or if they are denied credit. Get a copy of your credit report and review it from beginning to end. Do you see anything that shouldn't be on there? Do you have any questions? Does anything stand out as odd to you?
If yes, please contact LSS Financial Counseling for a free Credit Report Review at 1-888-577-2227 or visit our website for more information. A certified consumer credit counselor will help you understand what is on your report and help you create a plan to improve your credit report and score. There should never be any surprises on your credit report.
Written by Sarah Packingham