Credit Scores 101

Do you know what your credit score is? If not, you could be putting yourself at risk. Do not apply for a mortgage or even a credit card until you know what type of score you have. Many of today's consumers simply do not realize the power and the importance this one, little number has when it comes to managing your financial future. The good news is that the information is all right here for you.

Credit Matters

Credit scores matter. Not only do lenders use these numbers to determine if they should lend to you, but there is now more people and businesses using the information.

The bottom line is that credit scores will follow you for years to come. Without a good credit score, you could suffer by paying too much in interest or being turned down for the loans you want and need. Instead of allowing this to happen, get up to date on credit scores. The credit score 101 here, provides you with the information you need to get ahead.

Find out what your score is, what it should be and how to get it there. Then, feel confident that you can get the loan that you want and need.

A quick crash course on what you need to know about your credit score, how to protect it and what you can do to make it better.

Questions & Answers

The first obvious question: What is a credit score?

A credit score is a future indicator or predictive measurement based on previous credit history of an individuals creditworthiness to payback debts. A credit score is based off of a person's social security number (xx-xxx-xxxx). History always gives a clear picture of the future, right.? Well, when it comes to credit, credit scores are pretty accurate about predictiing the future; however, they certainly aren't without their flaws such as inaccurate information.

What is a FICO score?

An Acronym for Fair Isaac and Company. The standard of assessing credit risk for companies was adopted by the three major credit reporting agencies: TransUnion, Experian and Equifax in the mid-80's. Scores range from 330 to 850 with the general classifications highlighted below.

Credit Type Score Range Percentage of Population
Excellent Credit 700 to 850 (15% of population)
Good Credit 660 to 699 (25% of population)
Fair Credit 600 to 659 (25% of population)
Bad Credit 330 to 599 (35% of population)

What is the difference between a credit score and credit report?

A credit report is a consolidated record of an individual's outstanding debts and timeliness of payments made against those accounts (< 30 days, 30 to 60 days, > 90 days). A credit score is a proprietary formula applied to an individual's credit report to estimate credit worthiness at a given point in time. Below is an overview of what is contained in a credit report.

  1. Existing Credit Accounts
  2. Payment History
  3. Credit Inquiries
  4. Debt Outstanding Amount to Credit Limit Amount
  5. Bankruptcy and Liens

What is considered when calculating a credit score?

Each credit bureau weights credit history information differently. Generally speaking, below are typical levels of weighted importance when determining the credit worthiness of an individual.

Credit Info Example Percentage of importance
Payment Timeliness / History (e.g. Percentage less than 30 days) >> 40%
Debt / Balancing Outstanding (e.g. Debt Balances) >> 35%
Duration of Credit Established (e.g. 1, 5, 10 years) >> 10%
New Credit (e.g. New accounts) >> 10%
Types of Credit (e.g. Revolving, mortage, etc.) >> 5%

Why do you need to keep track of your credit score on a regular basis?

Identity theft is a threat to everyone. The FTC (Federal Trade Commission) estimates that over 9 Million people have their identity stolen each year. Having your identity stolen is not only highly inconvenient it's also very expensive to restore. Most people how have their identity stolen spend over 40 hours trying to return their credit to its original status. 

Thanks to several advances in analytical software, consumers can avoid identity theft through preventive identity protection. This means subscribing to a service which constantly monitors changes in consumer credit profiles and notifies subscribers of said changes. This way, consumers can stay on top of their credit score on a daily basis through email alerts. We have listed different identity theft services which you can compare.

What you can do to improve your credit score:

Five simple tactics will go a long way.

  1. Make sure to pay under 30 days. If you are going to submit late, contact the receiving company before payment is due.
  2. Lower the amount of debt outstanding as much as possible. A lower debt utilization ratio (debt divided by available credit) equates to less risk.
  3. Don't cancel your oldest credit accounts unless of course you are closing a mortage.
  4. Don't shop around for credit on a quarterly basis. You don't want lenders who review your credit report to think that you are constantly looking to move or increase debt.
  5. Mix up the type of credit you use. Vary credit between credit cards, installment loans, and loans with fixed payments.