Are You Making the Grade?
- posted 10.12.2011
- Rosemarie Pirio
- Personal Finance
And now for a riddle: It's a number that can range from 300 to 850, it can either cost or save you a great deal of money, it rewards "good behavior" and punishes for offenses committed in the past. It doesn't care about your race, religion, age, gender, employment history, or income, but over 75% of mortgage lenders and 80% of the largest financial institutions will use it to determine how much money they will loan you.
What Am I?
I am a FICO score! How much do you know about credit scores? Take this fun quiz to find out! If for some crazy reason, you don't make the grade, this blog will help you out with some of the FAQs on credit scores.
What Is a Credit Score?
Your credit score is the numeric grade you get based on your credit history. It's like your old English professor reading your essay and giving you a grade, only now they are looking at your credit report. Your professor, in this case, could be one of the three national credit reporting agencies, Equifax, TransUnion or Experian.
These are the three top credit bureaus, although other companies can provide their own version of your credit score. The most commonly used credit score is the FICO score, developed by Fair Isaac and Company. You have 3 FICO scores, one from each of the top 3 credit bureaus. Your 3 FICO scores may vary slight as it's based on the information the credit bureau has on file for you, and as your credit report changes.
FICO scores range from 300-850, and the higher your number, the better. Your FICO score communicates to lenders the probability that you will be able to make your loan payments and make them on time. The higher the number, the more likely you are to able to pay back your loan on time.
Who Cares About My Credit Score Anyways?
According to Ray Martin, The Early Show's financial advisor, lenders such as banks, financial institutions, finance companies, mortgage lenders, credit card issuers, home insurers, cell phone companies, utility companies, future employers, and potential landlords all want to see your credit score.
Mortgage lenders, cell phone companies, banks, financial institutions, finance companies and credit card issuers look at your credit score to see if you are eligible for their services, and at what interest rate. Having a higher credit score, means getting a lower interest rate. This means your FICO score can either save you a great deal of money, or cost you a lot!
How Is a Credit Score Determined?
Now that we know how important they are, how are they calculated? Your FICO score is based on 5 factors: your payment history, amounts owed, length of credit history, types of new credit, and types of used credit. The two biggest factors are your payment history (35%) and amounts owed (30%). Payment history takes into account late payments, missed payments, bankruptcies, etc. The more these show up, the worse for your credit score. Amounts owed is looking at a person's utilization or debt to credit ratio, referring to the amount of your available credit that you are using. The more you borrower and use from your available credit, the worse for your credit score. The goal is to keep you credit card balance below 30% of your credit limit.