If you’ve got your credit report in one hand and your FICO score in the other–and you wish you had a third hand to scratch your head in perplexity–you have come to the right place. Yes, gleaning useful information from that seemingly cryptic report and random “score” feels like an insurmountable task–one worthy of the deciphering skills displayed by Tom Hanks’ character in the Da Vinci Code. But the truth is that understanding how your credit report works and what, exactly, that FICO scores means is not complicated at all.
Yes, you can unravel the mystery of the credit score without an advanced degree in finance or hieroglyphics. Here’s what you need to know.
Your Credit Score Matters
If this is the first time you’ve requested your credit report, you have made a wise first step. Everyone should keep tabs on this important information. After all, this is the key indicator of your “credit health” to potential creditors and, in some cases, employers. It helps to determine your rate of interest, your credit limits, and whether or not anyone will lend to you at all. In CBS News‘ “Understanding your Credit Score,” Financial Advisor, Ray Martin, warns “over 75 percent of mortgage lenders and 80 percent of the largest financial institutions use FICO scores in their evaluation and approvals process for credit applications.”
Your Credit Report and your Credit “Score” are Two Different Things
Your credit report is a snapshot of your present and past credit history. It contains a record of your borrowings for the past seven years (bankruptcies stay on file for a decade). It does not contain your credit score, but it is used to calculate it.
There are three different credit reporting agencies, otherwise known as credit “bureaus,” in the United States–Equifax, Experian, and TransUnion. It is not uncommon for each bureau’s reports to contain some different information. If you’d like to see a glimpse of a sample credit report, visit “Read a Credit Report.”
Your credit score is frequently referred to as a “FICO” score. Why? The Fair Isaac Company was responsible for creating a program in the 1980s that converts your credit report into a “grade” or score. This FICO score is used by the big three, aforementioned, credit bureaus. But, due to the possibility of differences between one report and another, you may actually have three different FICO scores.
The Higher the Score, the Better
It seems that “more is always better” and the same goes for your FICO score. The higher the score, the better risk your are for lenders. While there appears to be discrepancies between sources on what constitutes so-so, average, fair-to-middling, and such, they seem to agree on what is poor and what is excellent.
350-619 Poor. Someone in this range would be what the Urban Dictionary refers to as a “credit leper” or untouchable in the credit world.
720-850 Excellent. These are the people who can often enjoy lower than prime interest rates.
Why is there so much confusion over credit scores? “The Difference Between a Good and Bad Credit Score” explains that a “good/great credit score is whatever score is high enough to get you approved for the lender’s best deal.” And, this varies between lenders, types of loans, and other determining factors.
5 Categories Affect Your Credit Score
In order to improve your credit score, it is important to understand what things impact that score and the weight placed on each.
35% Payment History. If you pay your bills in a timely fashion without missing due dates, this will greatly improve your credit score.
30% Balance Outstanding. The lower the percentage of available credit being used, the better.
15% Length of Credit History. If you have credit cards that have been opened for a long time, this is a good thing.
10% Type of Credit. This looks at the nature of your borrowings. It is good to have a mix of credit card, car loans, lines of credit, and not simply a huge whack of credit cards. Aim for a balance of installment, revolving, and consumer finance products.
10% Credit Inquiries and New Credit. Try to limit the amount of store card offers you accept as these can impact your credit score in a negative way.
You Need to Keep on Top of your Credit Score
According to the Federal Trade Commission, “the Fair Credit Reporting Act requires each of the nationwide reporting companies–Equifax, Experian, and TransUnion–to provide you with a free copy of your credit report, at your request, once every 12 months.” This will enable you to check for reporting errors and have them addressed.
These reports, however, do not include your FICO score, but you can obtain this–for a price–from myfico.com.
So there you have it. You have mastered the art of understanding your credit report. And you didn’t need that third hand to scratch your head at all.
What other tidbits of information can you share with someone trying to read their credit report?