What’s Your Credit Score?

Once upon a time, unfortunately in the not too distant past, credit scores did not matter much. Today is a different story. If you plan on financing just about anything from a car to a home to a refrigerator to an apartment, you need to have a down payment, proof of income and a good credit report.

With the internet today, getting a credit report is quite easy. So how do you know if you are creditworthy? Basically by your credit score. Having a good credit score can mean not only the difference of qualifying for a loan but also what interest rate you will pay on that loan.

According to FICO, Fair Isaac Corp., the national median credit score is 723. The maximum is 850. Having a score of at least 760 should you get you the lowest interest rate available. And keep in mind scores aren’t important just for borrowing. Landlords, employers and insurance companies also may evaluate credit scores.

Although the calculation of a credit score is somewhat complicated, it is important to know. There are three credit bureaus which monitor your FICO scores – Equifax, Experian and TransUnion. Accessing your report from each of those bureaus can be done at www.AnnualCreditReport.com. All consumers are eligible to access their credit report once every 12 months free of charge. Be cautious of offers for free reports from companies that require a purchase or commitment to access your report or score. Also, although your detailed report is free of charge once every 12 months, you must pay a small fee ($10.95 - $19.95) to view your FICO score.

According to Fair Isaac, five components go into its credit scores: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit (10%).

With payment history carrying the most weight, making payments on time is critical. If you make a late payment, contact the lender to explain why and they may remove the late payment from your report. Those late payments will damage your score quickly and significantly.

The second most important component is amount owed. That is the amount outstanding divided by the total amount of available credit. Paying more than the minimum on a regular basis will improve your credit score. A good rule of thumb is to keep the ratio of outstanding debt to available credit under 40%. A large amount owed will hurt your credit score, even if payments are made on time.

Although less important but still significant is the length of your credit history. In general, having accounts in use that have been established for a long time will help your score and the opposite for new credit lines. If you don’t use older credit lines then you may get penalized for having too many accounts or too much credit available. Many credit card companies today are reducing credit limits even without missed or late payments. Simply having the credit available can be viewed as risky for a lender in this economic environment. So although you may have a $1,000 balance on a credit card, a lender may see that you can quickly access another $9,000 and that could work against you. If you plan to apply for a car loan or mortgage you may want to wait to open any new accounts (even if it is to get a promotional discount for new cardholders).

In summary, know your credit score. If it falls below the national median of 723, then you are likely in need of credit repair. This will involve making good credit decisions in the present and the future. Banks can no longer afford to make sour loans so a good credit rating is crucial for everyone.