If you have credit, you have a credit score. One recent study found that only 2% of Americans knew their score or what it measures. Your score is a 3-digit number that sums up the risk in lending to you. The higher your credit score, the better risk you are. Your credit score summarizes the information in your credit file. When you have a good score, lenders will compete for your business and give you the best interest rates.
Your credit score is generated every time somebody runs a credit check on you. All 3 credit bureaus (TransUnion, Equifax and Experian) use formulas to evaluate different aspects of your credit report and then spit out a number: your score.
Under FACTA (Fair and Accurate Credit Transactions Act of 2003), you have the right to know your credit score. However, credit bureaus are not required to provide your credit scores for free, as they do your credit report. You always have to pay to learn your credit scores.
Each credit reporting bureau uses its own scoring system, but they’re all based on what’s called the FICO score. FICO scoring was developed by a company called Fair Isaac Corporation (“FICO” is an abbreviation). Experian calls its system FICO, Equifax’s is named Beacon and TransUnion’s is Empirica. Each will probably score you differently.
Lenders may also have their own software that scores reports, but you won’t have access to those scores. Of growing concern are secret score databases that don’t allow for challenges to wrong information and “off-market” scoring systems that aren’t subject to any regulation.
The specifics of how each FICO system crunches its data are kept secret, but enough has leaked out that we know certain factors weigh heavily in computing your credit score. Many of these factors you have direct control over, so it is possible to influence your score positively.
- Your payment history
- The amount of debt you owe
- What type of debt it is – car or home loans, credit cards, store charges
- How much new credit you have and your credit limits
- How long your credit history is
- The amount of debt you have in relation to your total credit limits
Of lesser weight:
- Education level
- Home ownership
- Stable address
- Years of employmentBack To Top
Credit score viewers
Credit scores play a major role in decision-making for credit, loans, jobs, apartments and more. The list of permitted users that may request your report is broad. Some consumer advocates have voiced concern that your credit score might eventually be used as a prediction device for non-financial purposes such as deciding whether to offer you health care coverage.
If you think score doesn’t matter, think again. Among the groups that may view your report and score are:
- Mortgage lenders
- Auto lenders
- Financial services companies
- Insurance companies
- Energy companies
- Phone companies
- Cellular phone companies
- Current & prospective employers
- Retail stores
- Cable companies
- Government agencies for licensing
- Child support enforcement
Generally your written consent is not required, except in cases of employment. An exception is in Vermont where ALL users need your oral or written consent. In reality, most potential creditors request your consent on every application. Interestingly, companies that provide pre-approved credit offers can pull your report without your consent. However those inquiries don’t count against you because you didn’t authorize them.Back To Top
Credit score scales
Your credit score is somewhere on a scale from 300-850. Fair Isaac (the score model developer) puts the average American score at 723 but Equifax puts it actually much lower.
Certain credit score thresholds have big meaning. Being over 720 means you have very good credit and should qualify for any loan at good interest rates. Over 750 and you’ll get top of the line treatment. The credit danger zone is a score below 650. Most lenders pull scores from all three bureaus and then use the middle one.
See the pie chart below for information on the things which most affect your credit score.
- 750-850 Excellent – you’ll get any loan with the very best terms
- 700-749 Very good – you qualify for highly competitive interest rates
- 650-699 Good credit
- 600-650 Fair
- 550-600 Poor
The credit reporting bureaus have recently cooperated and created a new system called VantageScore. Vantage uses a new scale for credit scores that roughly corresponds to school grades. The bureaus hope to standardize credit scoring, and if they do, they’ll control a very lucrative business.
- 901 – 990 = A
- 801 – 900 = B
- 701 – 800 = C
- 601 – 700 = D
- 501 – 600 = F
Here’s how the credit scores divide by population percentage:
Good score benefits
A good credit score is your passport to the best interest rates for mortgages, car loans, credit card offers with perks like miles and payment holidays, employment offers, premium insurance rates and more. Your score is worth money because it saves you excess costs, so don’t ignore it.
For example, see how a fixed 30-year mortgage payment varies according to credit score and the interest rates it dictates. A difference of two hundred points in score offers savings of $448 a month for the same $200,000 house loan.
Raising credit scores
You can raise credit scores in three ways:
- By removing information that is wrong and affecting you negatively
- By changing your behavior so you pay bills on time and don’t carry a lot of debt
- By rapid rescoring, a method of quickly re-computing score after debt is reduced (usually paying off balances
Your credit report is affected by new information all the time so keep in mind that your credit score is always fluid and changing. For detailed information on raising your score, visit our Raise Credit Score page.Back To Top
Beware of quick fixes
Unscrupulous vendors online take advantage of people who are stuck in credit card debt. Credit repair come-ons include promises of raising credit scores overnight, wiping out all the negatives in your credit report, even creating new identities. Don’t believe it.
There is no magic fix. No credit repair outfit in the world can get into Equifax’s, Experian’s or TransUnion’s systems and perform this trick. Negative information on your report stays there until it is proven to be wrong or it’s been 7 years. That’s the MAXIMUM amount of time most negative information can remain on your report so it’s to your advantage to request its removal. If you wait until the bureau gets around to it, it could be much longer.Back To Top
- Bankruptcies – 7 years for Chapter 13, 10 years for Chapter 11
- Debts & delinquent child support payments – 7 years
- Arrests and misdemeanors – 7 years in California, indefinitely elsewhere
- Criminal convictions – by federal law they can remain on indefinitely
- Unpaid tax liens, court judgments – 7 years or beyond
- Payment Record, from last period reported – up to 7 years
- Good information – indefinitely
- Credit inquiries – 2 years
Source: Privacyrights.orgBack To Top
Fast facts on American credit habits
- The average American has 13 credit accounts – 9 cards and 4 installment loans
- Less than half of all consumers have ever been 30 or more days late on a payment
- 3 out of 10 have ever been 60 or more days late
- Under 20% have ever had a loan or account closed by the lender due to default
- 40% of people carry a credit card balance under $1,000
- 15% have balances above $10,000
- Almost 37% carry more than $10,000 of non-mortgage-related debt
- The typical consumer has a combined credit limit of $19,000
- 1 in 7 are using 80% or more of their limit
In your financial life, few things figure as prominently as your credit report and credit score. Learning the basics of the credit report process, and keeping your credit report free of errors, is essential to good financial health. You should focus on improving your credit score as the highest credit scores receive the best interest rates and loan terms. On a mortgage, a difference of 100 points could be worth hundreds of dollars each month.
Since 2005, all Americans have the legal right to obtain a free annual copy of their credit report from TransUnion, Equifax and Experian credit reporting bureaus. This law is intended to help consumers reduce errors in their credit reports by minimizing the obstacles to viewing credit reports. To receive a free credit report visit the official site run by the bureaus: annualcreditreport.com
Your personal credit score is a number from 350-800 which stands for your credit risk. The higher numbers are considered less likely to default. Credit scores come from mathematical formulas that measure many variables in your credit report such as payment history, public records, and debt to income ratio.
The Fair and Accurate Credit Transaction Act (2003) amendment to the FCRA Fair Credit Reporting Act guaranteed all Americans the right to see their credit report once a year to check it for errors. To learn more about free credit, credit scores and financial terminology, visit our glossary page.