Credit Scores

Description

Even the most money savvy of us need access to credit at one time or another in our lives. Mortgages and college loans provide funds for the life's basics – putting a roof over your head, and receiving a good education. Auto loans and credit cards perhaps are a little harder to justify, since why buy something when you cannot afford it. (Sorry, that’s my grandma talking!) So credit matters, and if you are planning on taking a loan in the near to medium future, you should be aware of your credit score, ie what it is, and how not to damage it.

Whenever you apply for a loan, the lender, as part of the approval process, will contact one of the three main bureaus to access your credit report. The three bureaus, Equifax, Experian and TransUnion provide slightly different formats of report, but the basic information is the same.

Contents of typical credit report:

Personal Information. Your Name, DOB, Social Security Number and Address

Credit Accounts Summary. Details of your loans accounts, including account type, lender name, account number, balance and payments history.

Negative Items. Late payments on loans, bankruptcy, foreclosures, judgements etc.

Previous Requests of Report. Date report requested and by who.

Credit score

For a complete sample Experian credit report see Experian Credit Report.

The credit score contained within your credit report is generally your FICO score. This is calculated by the credit bureau according to a computer system devised by the company Fair Isaac. FICO scores have a 300 to 850 range with 750 to 800 being the most common score (a ‘good’ rating).

Getting the contents of your credit report (without scores) is easy, and is definitely a good idea if you a planning on taking a loan in the near future. Each year you can obtain one free copy of your credit report from each credit bureau, see annualcreditreport.com. Obtaining your actual FICO scores costs a small amount, you can do this at myfico.com.

When you receive your credit reports firstly check for errors. If you find any contact the relevant bureau, detailing the error, and asking for it to be corrected. Next look at the Negative Items section. If you are in arrears with any payments, you’ll now realize the knock-on effects. Catch up with any if you are behind, and remember in future to pay on time. Also clock the ‘Previous Requests’ section – note that the presence of many requests, as a result for example of shopping around for a loan (each time you fill in a loan quote form, the lender will access a credit report before deciding on an appropriate rate of interest rate to offer) may impact your creditworthiness with some lenders.

If your credit score falls short of that 'good' range, you are risking i) being denied access to credit and ii) being offered higher rates of interest than may be the case with a better score. It’s a good idea to check the FICO site to obtain a full action list. Their top tips include Apply for and open new credit accounts only as needed, Have credit cards but manage them responsibly, and Note that closing an account doesn’t make it go away.

Notice that perversely having credit card(s) actually raises your credit score, as long as you keep up with the payments. Now what would my grandma think of that!