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Credit Scores 101: How They Work & How You Can Save
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Submitted by:
Tip Hero
06/23/2009 12:31 PM
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One way to save money -- and potentially a lot of money -- is to improve your credit score. The rate you pay on your credit card or a loan (such as a car loan or a mortgage) is effected by your credit score. The higher your score, in general, the lower your rate (and the more credit you'll be able to get). We took a stab at breaking down the basics with the hope of making your credit score easier to understand. Here goes....
Your "credit score" usually refers to your "FICO score" ("FICO" stands for the "Fair Isaac Corporation", which uses a formula to calculate the score). Your FICO score is what most lenders use when evaluating your creditworthiness. [Note that there's a basic FICO score, calculated by Fair Isaac, that most lenders use, and then there are separate FICO scores for each of the three credit reporting agencies (listed in the third graphic in this article), which are calculated by Fair Isaac but are based on each agency's own criteria -- and this is a big reason why FICO scores can vary. More on this later.]
So how is your FICO score caculated? We put together a pie chart below that's based on a New York Times article that explains the breakdown:
And what's a good score? Generally, the higher the better:
To find out your FICO score, the New York Times suggests using MyFico.com:
Myfico.com offers two reasonably priced options on its site. The $15.95 FICO Standard package (as of December 2008) gives you 30-day access to one FICO score and a credit report from one of the three major credit agencies. The $47.85 FICO Credit Complete package gives you 30-day access to your FICO scores and credit reports from all three major agencies. If your FICO score is below 700, or it's above 700 but you still have room for improvement, you should review your credit report. There are three major credit reporting agencies:
While you should get your FICO score directly from a place like MyFico.com (and not from one of the three major reporting agencies listed above), you'll want to review credit reports from each of the three credit reporting agencies to see if your reports are accurate and look for where you might be able to make improvements. By law, you can get a free credit report from all three agencies. From the FTC.gov website:
AnnualCreditReport.com is the ONLY authorized source to get your free annual credit report under federal law. The Fair Credit Reporting Act guarantees you access to a free credit report from each of the three nationwide reporting agencies - Experian, Equifax, and TransUnion - every twelve months. The Federal Trade Commission has received complaints from consumers who thought they were ordering their free annual credit report, but instead paid hidden fees or agreed to unwanted services. Don't be fooled by TV ads, email offers, or online search results. Go to the authorized source when you request your free report. Once you have your report, you should contest any inaccuracies directly with the credit reporting agencies, and you should also work to improve your credit report, which will improve your credit score.
So remember: Your FICO score is what matters most when it comes to what rate you get on your credit card or your loan. It's probably worth spending a few dollars to find out what your FICO score is. If it's not where you want it to be, order your free credit report and take the necessary steps to clean it up and improve your score. A little effort and a few dollars now could bring about big savings in the future.
Credit Scores: What You Need to Know (NYTimes.com)
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