Your Credit Score

What is it?  How is it calculated?  What does it impact?  How can you improve it?

Do you know your credit score?  Or do you even know what it represents?  And how it can impact your life?

Your credit score is based on a point system and in theory identifies your potential risk as a debtor to various creditors.  It can be used by banks, insurance companies, mortgage and car lenders, credit card companies, and utility companies, to name a few.  It can justify a rejection on an application or maybe more onerous terms.  You should know what it is, and you should understand how to improve it.

The components of a credit score (often referred to as your FICO score, but more on that later, as it is one of a number of scoring companies) include your payment history, your total amount owed and in comparison to the total lines, your length of credit history, your types of credit, and any newer credit.

Scores by FICO range from a low of 300 to a high of 850.  Anything under 670 to 690 is considered fair to poor and will definitely hurt your personal credit.  As you move up the grid, you may receive preferential rates and terms.  Your goal is to move up.

As an aside, the average FICO score was 711 in July, 2020.  Not surprisingly, the older you are, the more likely your score is higher. 

It is a fallacy to assume that closing unused credit cards will improve your score.  To the contrary, the lower utilization is a positive for your score.  Instead of closing those cards, put them away and not use them.

Also, the credit bureaus can have inaccurate credit information about you.  It is more common than you think.  Sign up and get your free credit report once a year from the three major bureaus.  Then check it carefully.  Advise them of any errors.  The FTC recently did a study and found that one in five reports had errors.

There are other benefits to reviewing your credit reports annually.  (Before I froze my credit reports, I staggered the free reports over the year so I was never more than three or four months without a current report.)  You might find inquiries and/or accounts that you did not initiate.  Jump on it immediately to protect your identity.

Increasing your existing credit lines also improves your score as the utilization drops (as long as you don’t buy more stuff with the higher line).

Apply for a new credit card if you qualify.  That will reduce your utilization as well.

Improving your payment history is most important.  If you can do it for six months, your score should improve.

The amount of cash you have in various accounts has no bearing on your credit score.  Consider using cash if it meets your needs rather than credit cards or loans.  But remember to always have enough cash available for emergencies.  Lenders give you umbrellas on sunny days but take them back on rainy days.

There are companies that can help repair your credit, but following these steps will work wonders without them.

Go retrieve your credit score.  Some banks and credit card companies offer it as a free benefit.  You can always go to the major credit bureaus and buy it from them.  Experian, Transunion, and Equifax.

FICO, as I mentioned earlier, is a private company.  It was started in the 50’s by two men named Fair and Isaac, who formed Fair, Issac and Company, which gave rise to the FICO acronym.  There are other companies now providing this service to the creditor community, but FICO is the largest.

The safest place to get your free credit reports annually is www.annualcreditreport.com.  Be wary of imposters.