|
Credit Report and FICO Score
Consumer credit data is big business in United States. Credit score or FICO score is the benchmark or lending standard in deciding credit worth of a consumer. When you look for a loan, your FICO score is the main and most important factor in the final interest rate that is offered to you. FICO score is based on the information stored in your credit report. Credit reporting in United States in done by three main agencies.
Equifax
Experian
TransUnion
Each one of them has a relationship with lenders and creditors who reports financial activities on a monthly basis. If you look at a credit reports from any of these three, you will notice that they essentially contains same information but might it might be stored and formatted differently. Based on the information on your credit file, they calculate a credit score that is based on various factors such as length of credit history, balanced owed and late payment.
Credit score is developed by Fair Isaac and Consumer Federation of America. It is a three digit number that is often referred to as FICO score as well. In simple terms, it is a number that helps lenders predict how likely you are to make your payments.
Credit score or FICO score does matter when you seek a loan. For example, on a 30-year mortgage loan, interest rate could be 5.5% for a score of 720 and 8.5 for a score of 580. That's a full 3 point difference. On a $200,000 loan, 3 points difference could cost you as much as $6,000 extra per year and it will add up over the life of the loan.
What is considered a good score?
Credit score of FICO score usually range from 300-850. If your score is over 700, you're considered good credit for most lenders but there are exceptions. Remember, each credit agency calculates your score based on the information it has on you. Since this information can vary, so does the score. You score can also vary from month to month as information on the credit file can change. For example, if you credit score is over 700 and all of a sudden you miss couple of credit card or loan payments, it may fall as much as 100 points.
What factors influence your credit or FICO score?
FICO score is calculated by using a complex formula developed by Fair Issac, Here is how FICO scores access what is on your credit file.
1. Your payment history - Your credit history makes up up to 35% of the score. If you have a long credit history and have made your payments on time, your score will benefit. Negative items such as unpaid bills and bankruptcies can lower this part of your score.
2. How much you owe - This makes upto 30% of your credit score. FICO scores look at the amount you owe on your accounts, number of accounts and how much of your credit line you are using.
If you have 10 credit cards and you carry balances on all of them, it will lower your score. On the flip side, if you pay them off and close them. Your score will get lower again. You would wonder why lower, you should expect it to go up since you got rid of the balances. But the fact it that if you close your accounts, you have reduced the number of accounts and that hurts your score. If you pay a credit card off and leave the account open, that will improve your score.
3. Length of Credit History - Length of credit history makes up to 15% of your credit score. Long credit history will improve your score. You can still get a high score with short credit history if you have shown a responsible credit management. This is one of the reasons why you should have some bills in your name or at least a credit card. These will help establish a credit history in your name.
4. New credit applications - New credit controls up to 10% of your credit score. If you have opened new credit card accounts recently, this will lower your score. FICO score is smart enough to distinguish between a single loan application and multiple loan application for the same purpose. For example, if your buying a house and looking for a $200,000 loan and you apply with five different lenders, FICO score understand that they are all for the same loan. However, all these applications should be submitted within a short time such as 30 days to avoid lowering your score.
5. Other Factors - About 10% of your credit score is influence by several minor factors that are lumped together here. One of the example is the type of credit. If you have mortgage or auto loans, that establishes that you can make
installment payments. If you use a credit card rather than writing a check, that could also influence this part of your score.
Remember, credit reporting agencies charge you a fee to provide you with a credit report. Federal government initiated an effort last year to allow customers to view their credit report once a year free of charge from Equifax, Transunion and Experian. You can review your credit report free of charge from anyone of them.
YOUR FREE CREDIT REPORT
Remember, this will allow you to see your credit report but no credit scores. You'll still have to pay for your credit score. However, you can still review your credit report for identity theft and other negative items. |
