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Credit Report

In these days of computerization, ever feel like just a number?

Well here's a number that can have a huge impact on your financial life. It's called your FICO score and is used by most lenders to determine how risky it is to lend to you. How can your credit worthiness be distilled into a single number? Isn't that unfair? Maybe yes, but that's life.

A FICO score is a 3-digit number ranging from 300-850. You have 3 scores, one for each credit bureau – Equifax, Experian, and TransUnion. The higher your number, the better, though do keep in mind your score is not the only factor in determining whether a lender will issue a loan.

Your score affects the interest rate you will be charged for various types of loans such as mortgages, home equity line of credits, and car loans. The higher your score, the better your rate.

How to monitor your credit report for free

Your score is computed from information contained in your credit report. You should review the information contained on your credit report at least annually if not more frequently. The Fair Credit Reporting Act entitles every taxpayer to one free personal credit report per year and per agency. The official web site is http://www.annualcreditreport.com/ Do not be fooled by any other similarly spelled domain names!

Nifty trick for monitoring your credit report

Stagger getting your free reports every four months, one at a time from each of the big three credit reporting company (Equifax, Experian, and TransUnion). This way you can review your report for accuracy throughout the year.

How are scored determined?

The exact formula is proprietary. However, here's a rough breakdown of factors that affect your score:

• Past payment history (~35%). This includes late payments, delinquencies and bankruptcies. The fewer the late payments, the better your score. A recent late payment hurts your score more than one from five years ago. The moral of the story is do not be late on paying bills.
• Outstanding debt (~30%). This includes what you owe on your credit cards and how much you owe on installment loans, compared with the original amounts of the loans. Someone who uses a high amount of available credit (say 75 percent) is a greater risk than someone who uses only 25 percent according to Fair, Isaac.
• Length of time you've had credit (~15%). How long you've had accounts and how often you use them.
• New applications for credit (~10%). According to Fair, Isaac, "research shows that opening several credit accounts in a short period does represent greater risk, especially for people who do not have long-established credit history." When you shop for a loan, try to bunch lender inquiries within a 14-day window period.
• Types of credit (~10%). This includes credit cards and loans, including installment and mortgage loans.

Category: FAQ