Back to basics week 2: your credit score matters
Posted January 14, 2010 11:21 a.m. EST
Updated February 11, 2010 4:01 p.m. EST
The second week of our 12-week Back to Basics Series focuses on your credit score. As you assess your financial situation in the New Year, it is important that you review your credit report, correct any errors and strive to pay off your debt. Your credit report contains the details of your credit payment history and current credit status. If you apply for a credit card, mortgage, auto loan, apartment lease or other type of credit, the lender will almost certainly check your credit report and credit score.
FICO: The Fair Isaac Corporation developed the credit score, known as the FICO score. This score is derived from past credit experiences and current debt load using a complex credit-scoring model. The resulting three-digit number, which ranges from 300 to 850, indicates a person’s credit risk. Those with the highest scores will obtain the best interest rates on their credit. Based on your FICO score, a potential creditor will determine whether or not to offer you credit and at what interest rate. In 2009, FICO began rolling out a new FICO 08 scoring system. It has the same scoring range (300-850) and you probably won’t know which model the credit agency is using when you get your score. The goal of the new model is to more accurately indicate higher and lower credit risks. In addition it is supposed to penalize borrowers less for small missteps, such as paying one bill late. More information on the new scoring model can be found in the link above.
Reasons for checking: One significant reason for checking your credit report—fraud. In the last few years, there has been a substantial increase in identity theft. If a person uses your name and other identifying information to obtain credit, he or she is influencing your credit score. If you check your credit score regularly (at least once a year) you can identify any fraudulent activity and work with the three national credit bureaus to repair your credit report. You can also put a credit freeze on your account to make it extremely difficult for others to open credit in your name. For more information, see Clark Howard’s Credit Freeze and Thaw Guide.
You may be surprised to find your credit report contains errors that are bringing your credit score down, such as debts that you do not owe. In that case, contacting the credit bureaus and correcting the errors will result in a higher credit score.
Another reason to check your score is because potential employers are increasingly checking credit scores for applicants, whether they need to or not. Many applications now require that you allow them to check your credit. If there are errors on your report, bringing down your score, it could cost you a new job. In this tough job market, you want to do everything you can to be an ideal candidate. Don’t let a low credit score prevent you from getting a good job.
Increasing your credit score: If you have any small debts, work to pay those off as soon as possible. Make sure you pay your bills on time, every single month. Another way to raise your credit score is to use less of your credit line. If your credit limits have been reduced (which has happened to many people lately), this is harder to do. A good rule of thumb is to use no more than 10% - 20% of your credit line on a credit card at any time during the month, even if you pay off your bill in full each month.
Checking your report – for FREE!: The good news is that federal law allows you to request a free credit report every 12 months. You can request one free yearly credit report from each of the three national credit reporting companies through AnnualCreditReport.com. The three national reporting companies are Equifax, Experian, and TransUnion.
You may request the three credit reports from each of the companies at once, or stagger your requests throughout the year. I recommend staggering them and requesting a report from one of the agencies every 4 months. This allows you to see if there has been any change in your report that could indicate fraud. The sooner you address any identity theft issues, the better.
Getting your score: The free credit report does not include your FICO credit score. You can order your FICO score through the Annual Credit Report website or through any of the 3 credit reporting agencies for a fee. You can also pay to obtain your credit report and FICO score, as well as detailed information on how to improve your score at myfico.com. If you don’t want to pay the $15 fee usually charge to get your score, use the FICO Score Estimator at myfico.com. I used the estimator and my actual FICO is within the range they came up with.
Keep in mind that you may have a different FICO score for each of the three credit reporting companies. That is because each company may have different information about your credit history and current credit status, which is another excellent reason to check your credit report and correct any errors as soon as possible.
Your homework for this week is to head to annualcreditreport.com, check your report from one of the agencies and begin to correct any errors you find. Checking your credit report will get you one step closer to having your financial house in order.
Next week’s Back to Basics article will focus on paying off all debts and living debt-free, a goal we can all achieve! As I always say, it’s your money – spend it wisely!