Educating yourself on the ins-n-outs of your credit report is a worthwhile action to take. Whether you are renting an apartment, buying a house, applying for a credit card, or looking for car insurance your credit score and profile will be an indication of your financial stability, and how risky it will be to lend you money.
First step: get your free annual credit report from each credit bureau to evaluate your situation so there are no surprises. You are entitled to a free credit report from TransUnion, Equifax, and Experian once a year so don’t be fooled by the paid sites that will give you the same information.
Your credit score will be the first indicator of your credit worthiness.
FICO (Fair Isaac Corporation) put together a calculation that determines your scores.
Scores range between 300 and 850, with 850 being the best credit score possible. Bills.com put together information provided by FICO for credit score and formula for your FICO calculation.
Excellent: Over 750
Very good: 720 or more
Acceptable: 660 to 720
Uncertain: 620 to 660
Risky: less than 620
Formula for FICO calculation:
35% on your payment history
30% on the amount you currently owe lenders
15% on the length of your credit history
10% on the number of new credit accounts you’ve opened or applied for (fewer is better)
10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)
Here is a chart that shows distribution of credit score in 2011:
So your score is calculated for lenders to assess what kind of risk they will be taking on when lending you money. So the better your score, the less risky you are to lend to. If you are a less risky borrower, you will ultimately end up with much better interest rates. This could end up saving you 10’s of thousands of dollars when it comes to a mortgage loan over 30 years, or any other type of loan you may be looking to obtain.
When looking at your report for items that negatively impact your score, you may see accounts that are past due. In this example you can see that there have been 7 – 30 day lates, and 3 – 60 day lates. Tightening up your budget and making more than your minimum payment to these types of accounts and getting them on track to where you are only using 50% or less of your credit limit will help move your score in the right direction.
After obtaining copies of your reports, you should check for inaccuracies. If you find that there are errors on your report, it is important to dispute these items to improve your credit standing. In an article on the New York Times Bucks blog, Tara Siegel breaks down the process of disputing erroneous information on your credit report. This is a good resource to learn the process of disputing errors on your report.
As a good credit rating will ensure better interest rates and more options when applying for credit it is important to know where you stand and the steps necessary to improve your credit standing.