So many people worry about their credit score. I would know, I am a victim of those sleepless nights? But, I want to know why? Why do we worry so much? Why is it so important? How can one number mean so much? My goal is to find out.A really important part of understanding how the system works, is to understand the components of the system itself. Three words...Experian, TransUnion and Equifax. Don't ever forget those names, because those are the agencies that will determine your credit “worthiness.” Your score is calculated from information that is in your credit history, also referred to as your credit report. It is often called your FICO score, which was developed by Fair Isaac Corporation and is the most popular system used today.
Your FICO score ranges from 300-850. If you have a score above 700, that is considered very good, but if you fall below 600, that is considered very poor. Your FICO score is made up of 5 different parts, your payment history, which is 35% of your score, how much you owe, which is 30%, the length of your credit history, which is 15%, new credit, which is 10% and other, which makes up the last 10% and can be any number of minor issues, such as too many different types of credit. All of these things are calculated in some unknown way that only FICO knows.
Your credit report doesn't just have your credit score, but a lot of personal information about you. It includes your name, address, social security number, date of birth and telephone number. It also keeps track of past information,for example old addresses and previous employers. Along with your credit information, it contains all of your banking information. I hope you didn't overdraft last month, because believe it or not, that's on there too.
Lenders and credit card companies want to know more about you, than you know about yourself. They want to be able to determine in a matter of minutes your ability to pay and the likeliness that you will pay. Your score fluctuates on a daily basis, every transaction you make can potentially affect your score. The upside is that it isn't completely hopeless, if you do fall below that unspeakable 600. There are ways to improve your score. Pay your bills on time and always try to pay them in full. Pay off any debts you have quickly and don't apply for credit too often. Over time, negative credit will be removed from your report, generally about 7 years.
So, if you were ever like me and wanted to know why your credit score was so important, now you know. Now we can both stay awake at night worrying.
References:
1. Understanding Your Credit Report and Credit Score. Nov. 9, 2007 Financial Consumer Agency of Canada.
<http://www.fcac-acfc.gc.ca/eng/publications/CreditReportScore/UCreditReport_e.asp#whatcr>
2. Credit Score. 2008. Wikipedia
<http://en.wikipedia.org/wiki/Credit_score>
2 comments:
Excellent post! I have recently done the footwork to find out my credit score and I was pleasantly surprised until I found out my exhusband had some notation on his credit that affected us because at the time we jointly owned a house. It took a week just to figure out the credit company was incorrect. What a hassle that really can negatively affect one's life!
You are so correct about your credit score being so important, it affects every aspect of your life determining if you get a good job or not, because the Government does a credit check on you, and your insurance. I have outstanding credit and proud of it, I always pay my bills on time and I try to pay in full. I’ve taught my daughters even if you do not have a lot of money and have good credit you can get anything you want. I do not have sleepless nights because that doesn’t not change your situation, In order to get out of debt you must pay one bill off at a time and I recommend starting with the lowest amount with the highest interest rate.
I am really enjoying your blog it is very informative. Keep up the good work.
Post a Comment