My Credit (FICO) Score: More than just a number

Your credit score (FICO) may seem to be little more than an arbitrary number, but it is a critical factor in determining whether or not you will receive credit or obtain financing at a preferred interest rate. Believe it or not, most folks don’t have a clue what their credit score actually is, how to find out and how to improve it. These days, with credit in general requiring better ratings, it’s almost mandatory that you know just what your financial health looks like to others.

Step One: Obtain your credit report

There are three major credit reporting agencies in the United States—Experian, Equifax and TransUnion. Almost everyone who will consider granting you a credit card, a charge account, an auto loan or a mortgage, will request a report on you from one or more of these agencies. This being a given, you should obtain one from all three agencies once each year and you are entitled to do so without cost by the Fair Credit Reporting Act (FCRA). Getting the reports requires little more than asking and providing identifying information to prove you are who you claim to be. You can do it online by requesting them from services like freecreditreport.com or annualcreditreport.com, or by writing to the individual agencies with a request. Once in hand, you will see what the lenders see before they see it and you will also have an opportunity top correct any errors or misstatements too. If you need help understanding just how the agencies create your FICO score, there is plenty of free information about that online too.

Credit scores measure credit risk

Lenders, whoever they are, are always concerned with minimizing risk. They prefer to lend to people with strong credit histories and a proven ability to repay their loans on time each month. Moreover, they reward those with high FICO scores
(generally over 700) with lower interest rates on mortgages, auto loans and even credit card accounts. And interestingly enough, approximately 60% of all American citizens currently have FICO scores between 700 and 850. These are the people whom lenders consider to be the lowest risk borrowers.

How FICO scores are determined

The three major reporting agencies take many factors into consideration and then ‘plug them in’ to customized software programs that automatically generate a FICO number. These factors include: Your payment histories, the amounts you now owe, how long you have owed, the types of credit accounts you have and how many new accounts you have recently added. They also consider the number of inquiries about you and any derogatory comments that may be in your reports.

You can improve your FICO score

If your FICO score is below 600, you can expect to be charged higher rates of interest on anything you borrow and, in some cases, you may not be able to borrow at all. However, you can improve this number over time by:

• Paying your bills on time
• Minimizing credit card balances
• Refusing to add new credit accounts you don’t really need
• Managing your credit cards responsibly
• Correcting any derogatory information in your credit files

Remember that your financial health is measured by your credit score, so it is well worth the effort required to raise the FICO score if you can.

Your free credit reports will not contain your credit score. You should only get scores from MyFico.com