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Credit Scores
What is a Credit Score?
A credit score refers to a number between 300 and 850 that can tell lenders at a glance how risky of a borrower you are. The score is published by the Fair Isaac Corporation (thus credit scores are also called FICO scores), and includes a number of factors from your payment history to the types of credit you’ve had.
Your credit score can determine your interest
rate on credit cards, mortgages and auto payments; it can even
affect whether you can get an apartment or job.
If your score is low, you’re high-risk, so you either will have high interest rates and fees or you won’t get a loan at all.
If your score is high, you’re low-risk, and you can reap the benefits of being courted with rewards and low interest rates.
What goes into a credit score
There are 5 factors that influence your
credit score:
1.
Payment history (35%). Do you pay your bills on time?
2.
Amounts owed (30%). How much do you owe, compared to how
much you’re allowed to borrow?
3.
Length of credit history (15%). How long have you been
extended credit?
4.
New credit (10%). Have you opened up a lot of new
accounts lately? (It’s a bad thing.)
5.
Types of credit used (10%). Are you paying off your
student loans diligently, or are you maxing out your credit
cards?
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How to build and boost a score
1.
Make your payments! It’s the simplest and strongest way
to show that you’re a reliable borrower and aren’t likely to
default.
2.
Keep your credit card debt low. It’s okay (and
encouraged) to charge purchases to your card, but if you’re
constantly maxing them out, it looks suspicious to lenders. The
ideal is to owe around 30% of what you can borrow. Keep in mind
that this includes credit card purchases that you made this
month and plan to pay off, they won’t earn interest but they are
part of your debt.
3. Don’t apply for or open too many lines of credit at once. Sudden increases in your accounts make lenders wary.
4. If you can, diversify your credit. If you have a personal
loan, student loan and credit card, it’ll build up your score
more than a wallet of credit cards will.
5. Don’t take out cash advances, as this indicates that
you’re strapped for cash and may default.
Start Building a Score
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To qualify for a credit
card, you need a credit history; unfortunately to build a history, you need a
credit card. Fortunately, there are two ways around this:
1.
Secured credit cards. A secured credit card makes you
zero-risk to the lender. You make an initial deposit, usually
equal to your line of credit (if you want to borrow $200, you
have to post $200), and borrow against it to build up your
score. When you close your account, you’ll get your deposit
back.
2. Get a co-signer. If a parent or other trusted person with
an established credit history (NOT your roommate) signs the
credit card with you, you can borrow against your co-signer’s
(presumably high) credit score. This lets you build your own.
Keep in mind that your missed payments and debts will affect
their FICO score, so don’t abuse the card. |
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Tips
Start building a credit score early on, even if that means a parent opening a credit card with you as a co-signer but never using it.
This will save you a lot of money on interest payments down the line.
Building credit is a lot easier when you’re a student. Issuers expect you to have a short history, so they’re willing to overlook it if you have income or a co-signer.
Once you’re out of college, you’re less likely to get a free pass. Don’t abuse your line of credit: make your payments on time, and don’t max out your cards. You’re already a bit of a risk with no credit history, and you’re much greater risk with a bad history.
Checking a Credit Report
Checking your score is part of the active management of your
financial life. By keeping good track of what your score looks
like you'll have a better chance of avoiding costly mistakes and
taking control of where your financial future is going.
Because your credit score is a factor that can help or hurt you
whether you apply for a credit card, try to take out a loan,
try to rent an apartment, or even apply for a job, .
You actually have 3 credit scores that are reported to FICO from
the three companies Equifax, Experian, and Transunion. Recent
legislation has given you the consumer the right to check your
score once a year from each company. You have the choice
to look at all three scores at once, or you can stagger them
every 4 months so you have a more consistent idea of your
report.
The best way to check your report is to go through
www.annualcreditreport.com It is the only site that gives
you the chance to see your reports for free. Many other
sites claim to let you view it but often actually require
signing up for a membership.
Once you have chosen to view a report you should look it over and make sure that there are no errors or problems on your report.
If you want to see your actual score each site requires you to sign up for a membership and then you will be allowed to see the score. Be careful though, if you forget about signing up for the membership the trial period quickly ends and you are then forced to pay the monthly fee and will be charged even if you aren't checking your score.
Correcting Errors
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You may find
discrepancies on your report. These errors can cost you
jobs, loans, and housing opportunities, so it is best to get
them taken care of immediately. When you find an error you
should first contact the company through whom the error is
listed and try to get the incident resolved. Remember to make copies of documents that are exchanged through the process of fixing the errors. Always request written documents when the incident is cleared and hold on to these in case they find their way back on to your report. |
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Follow the steps from the FTC when in question of how to contact the agencies found here: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm
And if you need to contact any agency here are their links:
Equifax Credit Information Services Inc.
https://www.econsumer.equifax.com/consumer/forward.ehtml?forward=home
P.O. Box 740241
Atlanta, GA 30374
TransUnion LLC
http://www.transunion.com/Personal/OrderOtherMethods.jsp
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
Experian
http://www.experian.com/consumer/index.html
National Consumer Assistance Center
P.O. Box 2002
Allen, TX 75013
