The Power of Your Credit Score Should not be Underestimated
Your credit score is a three-digit number that reflects your individual creditworthiness. It quantifies the likelihood that you will be able to repay your credit obligations in a timely manner and is the best prediction of risk a lender can assume when extending credit to you. Your credit score is automatically computed by a mathematical algorithm based on the information included in your credit report.
Your credit score is the most heavily weighted factor in determining approval for a credit card, mortgage, or other loan and substantially impacts the interest rate the lender will charge.
Amazingly, your credit rating can also impact a job offer. Yes, it is perfectly legal for a credit-reporting agency to supply a credit report for the purposes of employment screening, with your permission, of course. About 13% of employers check credit reports for all candidates and 47% check for those applying to selected positions, according to the Society for Human Resource Management.
How is my credit score calculated?
Your credit score is based on several factors and takes into account years of past performance, not just your current financial activity. Individual scores range anywhere from 300 to 850, with a “good” score generally in the area of 720, according to creditkarma.com. Each lender, however, uses their own guidelines, so it’s important to keep your score at its highest to earn the most favorable interest rates and the best chances of credit approval.
There are many different credit-scoring models available, but, according to myFICO.com, “90% of all financial institutions in the United States use FICO scores in their decision-making process.” FICO, which stands for Fair Isaac & Company, the organization that created the scoring scale, divides the information from your credit report into five main factors and weighs them in accordance with importance:
- Payment history: 35% of your total score is based on your account payment information, including any delinquencies. The repayment of past debt is, by far, the most important factor in calculating your credit score.
- Credit utilization: The total amount of available revolving credit compared to the total amount that has been actually borrowed accounts for 30% of your credit score. The smaller the percentage, the better it is for your rating. FICO considers those who continuously max out their credit cards as borrowers that cannot responsibly manage their debt.
- Length of credit history: 15% of your score can be attributed to the length of time each account has been opened and the amount of time since the last activity. Since history offers a more accurate demonstration of financial behavior, the longer your accounts have been established, the better.
- Types of credit: Repaying a variety of debt indicates the borrower can manage different types of credit, so borrowers with a mix of revolving credit and installment loans are looked upon more favorably. 10% of your credit score will be reflected in the types of credit you use.
- New credit: Your application for new credit, including credit inquiries and the number of recently opened accounts carries 10% of the weight. Only open new accounts when necessary and when it makes financial sense.
Any negative financial activity, such as late or missed payments, will lower your score. Thankfully, most of them will disappear from your report after seven years, so you’re not saddled with poor credit forever. Good debt, debt that has been repaid in a timely manner, will raise your score and help build more confidence from lenders.
What are the credit reporting agencies?
There are three credit bureaus, Equifax, TransUnion, and Experian. Each bureau independently calculates an individual credit score for you. The three scores should be relatively close to the same number, but may differ due to the information each agency has on file. Not all information is reported to all bureaus, which accounts for the difference.
Request a copy of your credit report
Federal law mandates the consumer’s right to a free credit report annually from each of the three credit reporting agencies. Request your copy every year to help manage your credit score, to ensure there are no errors and to verify all of your information is up to date. Even the tiniest delinquency can be costly, so be sure to review it closely. Click here to request your free report.