Know Your Credit Score
By Kelvin Boston
Host of the Moneywise PBS Series
Two years out of college and finally you land your first full-time job with a big company and a great starting salary. To celebrate you go out and test drive a brand new ride and order one in your favorite color. It would be the first new car you ever owned. You’ve memorized its every detail from headlights to taillights and all the accessories from the dashboard to the lock on the trunk. This baby is yours. Then roadblock. The car dealer calls with the bad news. You won’t be getting your ride. You didn’t make the score – the credit score. Yours was too low. This person could be you now or later. What happened?
Here’s what. Though you have a fabulous personality, the only thing that counted with the dealership was what was on your consumer credit report that ultimately affected your credit score. The credit report is provided by three major credit reporting agencies – Equifax, Experian and TransUnion. A lender may request reports from one or all three. This report is the only way lenders have of determining the likelihood of your repaying a loan and making timely payments as agreed. It is a factual record of your payment history and a critical indicator of your credit worthiness.
Most every creditor files a report with the credit reporting bureaus. So if you are not careful your financial past can come back to haunt you. For example your report would show the used runabout you bought on credit in your sophomore year of college and stopped making loan payments on when it broke down one last time. Your credit report will also show the four credit card accounts you ran up to their limits and made payments on every now and then and the student loan payments you forgot to pay after graduation. All of these experiences will reflect your responsibility level, impact your credit worthiness and be calculated in your credit score.
Depending on the credit reporting agency, the credit score may have been referred to as a Beacon score (Equifax), a FICO score, also known as a Fair Issac (Experian –formerly TRW) or less typically, Empirica (TransUnion). The credit scoring system is based on a mathematical formula that takes into consideration activity in your credit history. Lenders use the score as a benchmark. A high score is a starting point but other things can help or hurt you.
Some of those helpful things are new accounts paid on time and few outstanding loans. The things that hurt and drag down the scores are high debt, frequency of payments over 30 days late, bankruptcies, judgments, collections and owing out more than your income. Even inquiries by financial lending institutions can drop the score by two or more points, although personal inquiries and inquiries by credit card companies making "promotional" offers will not, according to some lenders.
The scoring system does not consider age, race, employment, residence, marital status, religion, national origin, sex or income. However, a lender will plug in your income to establish your debt ratio as a part of their consideration to give you a loan.
Credit scores generally do not stay the same. They fluctuate within a few points influenced by the activity on your accounts – not just the bad and the ugly activity but the good as well. Payment updates, or the addition of a new account can cause a small blip up or down.
However, scores are not stored as part of your credit history. Rather, scores are generated when a lender requests your credit report and it is included with the report. Scores can be as low as 300 and as high as 850. But most lenders won’t lend with a score under 500. From 690-740 is average with around 830 the highest. Low interest rate banks want at least 640, middle to high interest banks want 540 or higher.
However, even a score of 700, which would be regarded as great, can be denied credit if a foreclosure appears in the report. To learn more about your credit score visit www.Myfico.com. You can get a free copy of your credit report if you apply for it within thirty days of receiving a credit denial. Otherwise, you can access your report online and through the mail for a fee. All of the credit reporting bureaus offer free reports but usually it is tied to the promotion of a product or another service they are selling.
You don’t have to be handicapped forever with a bad credit history. You can fix your credit picture and raise your score by doing a few simple things: Pay off old debts, make payment arrangements and honor them. Within six months to a year your score should rise. Don’t sell yourself short with sloppy attention to your credit life. It is too important to your financial future. Always remember that credit reporting agencies and creditors take your credit history and score very seriously-and likewise so should you.
