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Credit Explained
A credit score is a number that indicates how likely a borrower is to repay future liabilities. The most common credit score is the FICO score which ranges from 300–950. The higher your score, the better off you are.
A credit score is a number that indicates statistically how likely a borrower is to repay future debts. Most lenders use scores that come from one of the three major credit bureaus: Equifax, Experian and Trans Union. These national credit bureaus collect information about consumers and keep it in individual consumer credit records. The credit bureaus generate scores based on the information in these consumer credit records. Each credit record includes the following data, collected from creditors and public records:
Identifying information (name, address, employer, Social Security Number, etc.)
Debt and payment history on credit cards, student loans, consumer loans, car loans, etc.
Previous collections
Tax liens, judgments and bankruptcies
Inquiries for new credit
The most common credit score is the FICO score.
The FICO score is generated by a mathematical formula (called a scoring model) developed by Fair, Isaac Company. To generate a FICO credit score, a credit bureau runs the data in a consumer's credit record through its FICO scoring model.
The FICO score ranks consumers on a scale of 300–950. Higher scores indicate a smaller risk of default; lower scores indicate greater risk of default.
Most lenders get credit scores directly from the credit bureaus or from a credit reporting agency that typically gets its scores from the credit bureaus. However, some lenders generate their own credit scores or get credit scores from a custom credit score developer.
How to Improve Your Credit
Here are three things you can do to improve a low credit rating:
Pay your bills on time. This is the single most important thing you can do to improve your credit rating. Be sure to pay at least the minimum amount required by the date it is due. The sooner you start paying your bills on time, the quicker your credit rating will improve.
Minimize your debt and apply for new credit cautiously.
Pay down your high credit card balances. Don't carry a balance close to your credit limits. The closer you charge to your credit limits, the lower your credit rating will be.
Tip: On average, lenders would like to see 3-4 open accounts; any combination of charge cards, auto loans, etc. Balances on credit cards should not be more than 33% of your line of credit.
Consider closing accounts you never use. Don't apply for loans or credit cards that you don't need. The more you apply for new credit, it's more likely that you will appear to be taking on more debt than you can handle, and the lower your credit rating may be.
Limit your department store cards and finance company loans. The more store cards or finance company loans you have, the lower your credit rating will be.
On the other hand, having a very limited credit history can have a negative effect on a credit rating. If you don't have a credit history, consider opening an account and using it responsibly, making the minimum monthly payments as required.
Once a year or before applying for new credit, make sure your credit records are accurate. You can check your credit records by ordering a credit report from each of the three credit bureaus - Equifax, Experian and Trans Union. If you've been denied credit, you can get a free credit report by following instructions in the adverse action notice. Otherwise, you can receive a copy for a minimal fee.
Annually, you should check your report at all three bureaus. Each bureau might contain slightly different information.
If any of your credit reports contains any errors, contact the credit bureau that compiled the report. The Fair Credit Reporting Act (FCRA) requires the bureau to investigate your disputed items within 30 days. The credit bureau must provide you with written notice of the results of the investigation within five days of its completion, including a copy of your credit report if it has changed based upon the dispute.
The Federal Trade Commission (FTC) is responsible for enforcing the FCRA. The FTC also publishes consumer-related brochures where you can find additional information on credit reports. To contact the FTC, call or write:
Federal Trade Commission
Public Reference Branch
6th Street and Pennsylvania Avenue, NW
Room 130
Washington, DC 20580
Phone: 202-326-2222
Web Sites: www.ftc.gov/ftc/consumer.htm and www.ftc.gov/ftc/moreinfo.htm
To order your credit report by phone or Internet, contact:
Equifax Consumer Services
Phone: 1-800-997-2493
Web Site: www.equifax.com
Experian
Phone: 1-888-397-3742
Web Site: www.experian.com
Trans Union
Phone: 1-800-916-8800
Web Site: www.tuc.com
The following factors are considered in figuring a credit score:
The amount of credit you have compared to your credit limit
The length of your credit history
The number and types of credit accounts you have
How active you are in applying for new credit
Public records pertaining to credit
These factors are NOT considered in credit scoring systems:
Income
Race
Religion
Gender
Marital status
Nationality
Age
Receipt of public assistance
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