The FDIC states that a credit score is a number calculated by a credit bureau, a lender or another company to summarize each person’s financial reliability, or creditworthiness. Credit scores can be used by lenders to determine if you qualify for a particular loan or a lower credit card interest rate. What you may not realize is that your credit score may also be used to determine other important financial factors in your life such as your life insurance rates and auto insurance premiums. Credit scores can even be used by prospective employers and landlords when you apply for a job or before you sign a lease.
The most widely-used credit scoring model is the “FICO” score, created by the Fair Isaac Corporation in the mid 1980’s (others include VantageScore, and FICO NextGen). FICO Scores range from 300 to 850. Higher scores reflect good credit habits such as paying bills on time and keeping your outstanding credit within approved limits. If your FICO score were a big pie as shown in this chart, a percentage of it would be made up by 1) your payment history, 2) the amount you owe, 3) the length of your credit history, 4) the new credit you acquire, and 5) the types of credit you use. Previously, FICO scores around 640 were considered good or excellent. But that is not the case anymore; 740 is the new magic number.
Each of the three credit bureaus (Equifax, Experian, and TransUnion) may report a different credit score number for you based on the reporting data they have available in their systems. However, unlike credit reports which you can get for free annually, obtaining your credit score usually requires paying a fee. If you do see any “free” credit score offers, be sure to read the fine print, as they could include charges for other credit services you will pay for on a monthly or ongoing basis, if you don’t cancel them in time.
How do you improve your score? You might be surprised, because doing things like closing an account that you don’t have a balance with anymore may negatively impact your credit score. Read Five Ways to Improve Your Credit Score and How to Clean up Your Credit Report for great tips on increasing your credit score and removing inaccurate information from your credit history. You can also check out the Credit Score Videos (Part 1 and 2) from the National Foundation for Credit Counseling.
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Elizabeth,
I found your blog about credit scores to be on the money, so to speak. I’ve dealt with the credit bureaus and agencies more than I would have liked because of a case of identity theft that trickled into my records with the credit reporting agencies. It took years to resolve the issue but I’m OK now.
annualcreditreport.com is a great way to stay on top of one’s financial status although I’ve been frustrated by the process of getting information from the credit entities on more than one occasion.
I found a great way to get a credit report without having to pay for it or get involved in a long-term commitment and expense. I live in a small town and know my banker well. About once a year or so, I fill out a loan application for him with the sole purpose of having the bank get my credit scores. It doesn’t take long to fill out the application and the bank considers me a good enough customer to get a report as a courtesy to me. I think that asking one’s own bank to get credit scores periodically makes good financial sense and doesn’t cost me anything.
I found it very interesting that the ad at the bottom of this blog page is from FreeScore.com, an entity which, I’m guessing, will get one a credit score and sign the person up for a long term commitment with a substantial monthly fee. I don’t know what your feelings are about these folks (”free” credit report sites) but I think they’re a rip off.
Comment by donmack — September 1, 2010 @ 3:20 am
I would agree with donmack’s comments related to the free credit reports. They never work out to be so free. Have you found a truly free and easy way to get your free credit report?? The free ones I have tried in the past make you jump though many hoops. I would love to find a easy and free way to get this done each year.
Comment by mpearce@ teachade.com — September 1, 2010 @ 9:49 am
PS: I love your blogs each Wed!
Mike
Comment by mpearce@ teachade.com — September 1, 2010 @ 9:53 am
Will NEA Member Benefits be working on a plan to offer really free credit scores (no long term obligation with monthly charges) to NEA members in the future? It appears as though this will address some of the concerns raised here.
Don
Comment by donmack — September 2, 2010 @ 6:16 am
Great comments this week!
Mike, the only free credit report authorized by the FTC is the one Donmack already mentioned, http://www.AnnualCreditReport.com.
Don, thanks for the tip on getting your credit report from your local bank. As I state in the blog, always read the fine print. In researching this post, I found many of the so called free offers were part of some other unwanted credit product purchase. Also, I will forward your product recommendation on to our Financial Services group.
Take care, Elizabeth
Comment by NEAMB Elizabeth — September 8, 2010 @ 3:49 am