When I try to sit back and see banking from the perspective of someone who doesn’t spend every day “thinking” banking, there are very few things that seem more confusing than credit reports and credit scores. Reading a credit report is something I do almost every day and there are still times when I’m left scratching my head.
Since I do quite a bit of reading on this topic and still have trouble finding definitive and helpful answers in one place, I’ve attempted to collect and organize them in a way that is truly informative and useful. So, from A-Z, your alphabetized list of credit answers:
A credit score is what, exactly: a credit score is a snapshot of your credit health and is an indication of how you manage your debt.
Basic histories of all of your debts and payments are contained within a credit report.
Data is automatically transmitted by banks, finance companies, and other lenders to one or all of the three bureaus. The three bureaus take the data and analyze it to create your credit history and credit score.
Every person does not have a credit score. Credit scores measure how you handle your debt and payments, so if you do not have personal debt—i.e. credit card, car loan, home mortgage, student loans, etc.—you will not have a credit score.
FICO scores are credit bureau risk scores produced from models developed by Fair Isaac Corporation, the most well known scoring model. Most lenders use a FICO based score when evaluating your requests for credit.
Good credit is a subjective and a moving target, but it usually means a credit score somewhere at or above 700. Credit scores (based on the FICO model) range from 300-850 but 60% of consumers’ scores fit within a range from 650-799, according to myFICO.com.
How many different factors help determine a credit score, and how important are they? The graph below shows the five main categories and their respective importance to your score.
(courtesy of myFICO.com)
Is there one quick way to improve a credit score? Actually no, but there lots of little things you can do to improve your credit over time including paying your bills on time, keeping balances low on credit cards, resisting the urge to open new accounts just to accumulate available credit, and many more. See here for a more comprehensive list of ideas.
Judgments, bankruptcies, collections, and tax liens all show up on credit reports and can have lasting effects on a credit score. Even after they are paid in full or discharged, these types of occurrences may stay on a credit report for 7-10 years.
Keep a close watch on where you get your credit report and score. There are countless companies out there advertising their “credit scores”, but they may not be using a FICO score and they may not be accurately portraying your true credit health. Even more importantly, watch out for unscrupulous companies who are just looking to gather your personal financial information for their own purposes. See letter ‘M’ below for a reputable resource and see the helpful table below for the name each reputable credit bureau gives to their FICO score.
|Credit Reporting Agency||FICO Score|
|Experian||Experian/Fair Isaac Risk Model|
Lenders use credit scores and reports as part of the loan application process, but they are not the only factors taken into consideration. The rest of your financial picture plays a major role in the evaluation of a request for credit.
Monitor your credit report and score by visiting annualcreditreport.com. This site is government sponsored and is managed collectively by the three major bureaus to provide you free access to your report. You are entitled to a free report from each bureau once every year. Helpful tip #1: the report is free but you have to pay a nominal fee (approximately $5 apiece) to get your FICO score from each bureau. Helpful tip #2: you can access all three reports at once or you can order each report separately at different times during the year so that you have more regular access to your credit history.
Now you’ve made it to the midway point in my list. Check back soon for the rest of the story.