13 Amazing Facts About Your Credit Score
A good credit score is critical to saving you money as a high score will allow you to get lower interest rates on loans, lower your auto insurance premiums and may have an impact on whether you are hired for certain jobs. Even though you may understand the importance of good credit, there is a lot of confusion about credit scores and the reports that help determine the scores. These 13 facts can will help you better understand your score.
FICO, which stands for Fair Isaac Corporation, was developed by an engineer, Bill Fair and a mathematician, Earl Isaac, who developed the first credit bureau-based scoring system in the 1980s. The scoring is based on the behavior of borrowers, looking for patterns of behavior that could indicate the borrower is a default risk.
More Than One Credit Bureau
The first thing that you need to know about your credit score is that there is more than one credit reporting agency that keeps information on your credit and each of them can have a different score for you.
Factors That Affect Score
Five of the most important factors that affect your credit score include:
- Payment history – 35 percent
- Balances owed – 30 percent
- Length of credit history – 15 percent
- Date of last credit application – 10 percent
- Types of credit used – 10 percent
No History, No Score
If you are just starting out financially, you will not have a credit history. If you do not have a credit history, you do not have a credit score. It takes time to build a credit history and, by managing your money properly, your score should rise as you add to that history.
Credit Reports vs. Credit Scores
Your credit report is where your credit history is stored. Your credit score uses information found in your credit report to determine what your score will be. Credit scores range from 300 to 850 and are based on open and closed accounts, your payment history, credit limits as well as the amount you owe.
Free Credit Reports
The federal government requires each credit bureau to provide you with one free credit report each year. However, that free report does not include your credit score. Some credit reporting agencies will offer to send your score with the free report for a small fee.
Affects More Than Credit
Your credit score is critical for getting low interest rates, but it also can affect whether you rent an apartment and can have an impact on what you pay for car insurance. For some industries, such as banking, a potential employer may use your credit score to determine whether to hire you.
May Not Be A FICO Score
FICO is the industry standard for credit scores. However, credit reporting agencies sometimes develop their own scoring methods. Make sure that the credit score you obtain is your FICO score and not based on another calculation.
Checking Your Own Credit
Checking your own credit will not have an impact on your credit report. However, each time you apply for credit, the inquiry made by the creditor can have an impact on your score. Limit how often you apply for credit in order to reduce the damage to your score.
Maxing Out Credit Cards Hurts
Even if you pay your bills on time each month, if you have charged credit cards to their limit, you could lower your credit score between 10 and 45 points for each card that is maxed out. This can significantly damage your credit score even though your bills are paid on time.
You Can Improve Your Score
It is possible to improve your score, even if you have filed for bankruptcy or had a vehicle repossessed. Negative references must be removed from your report after seven years and bankruptcies after ten.
Credit Scoring Is Controversial
Credit scoring is vulnerable to error and, with the increase in automated lending decisions, some consumer advocates believe the system needs overhaul. It has been criticized for its complexity and confusion. In 2011, the Dodd-Frank financial reform bill required lenders to disclose credit scores to those who applied for credit.
Designed for Lenders
Credit scores are designed for lenders and not consumers. For this reason, the scores are difficult to understand and the actual formulas used are heavily guarded secrets. In fact, Fair Isaac refused to provide details on how scores were calculated until 2000. It was not until 2003 that Congress gave consumers the right to see their scores.
Your credit score is an important part of your financial well-being so it is important to understand as much as possible about how it is computed and used.