Article by Andy Gorton

It doesn’t take much effort to find out your credit score, and once you do, you’ll know what lenders know when evaluating your credit application.

Be the odd one out–check your credit score.

Knowing your credit score is the first step towards improving your credit, but most people don’t take this first step. A recent survey by LivingWithBadCredit.com indicated that more than three quarters of the people they surveyed reported they didn’t know their credit scores within a 200-point range. Half had never checked their score, and 17% hadn’t checked in the last few years.

Where does the information come from?

Three major credit reporting agencies, Experian, Trans Union, and Equifax compile the information from which your credit score is calculated. A little over a third–35% to be precise–of your credit score derives from your payment history. Another third–30% to be precise–is calculated from the amount of your total outstanding debt. Within this, revolving accounts weight more than installment loans. Another portion–15% to be precise–depends on the length of your credit history; and smaller portions–10% each to be precise–describe the percentage of new credit, and the mix among forms of credit in your ‘portfolio.’

How does someone else know if your credit score is a good one?

Lenders and bankers use your credit score to estimate if you’ll pay your bills on time. Your credit score is the result of a mathematical formula that indicates the likelihood of a borrower falling delinquent in the next 24 months. A FICO score, for example, generally ranges between 300 and 850. Any score that tops 750 is considered a good credit risk, while a score below 620 is considered risky. Each lender decides for their own institution whether or not to lend to people with scores between thee two numbers.

What does a credit report look like? It’s simply a report of all of your credit transactions. When your credit report first reaches you, you might wonder if the printer went wild. The paper will be filled with numbers, abbreviations, and technical terms. What’s a ‘trade line,’ ‘a charge-off,’ an ‘annual review inquiry’?

How am I supposed to decipher this thing?

The credit report is divided into four sections; one heading for identifying information, one for credit history, one for public records, and one for inquiries. Information under the first heading, identifying information, is quite straightforward. When you read it, you might notice that your name is spelled more than one way, and that there may be more than one Social Security number. That’s okay: the system is set up to keep any variations. Information under the second heading, credit history, is pretty straightforward as well, even though sometimes this section is called a ‘trade line.’ Each creditor will list your account number, when you opened the account, the kind of credit you were offered, the total amount of the loan, how much you owe your minimum monthly payment, and the account’s status, as well as other information. “Charged-off” means that the creditor has made efforts to collect, and written them off. The third section, public records, is best when it’s blank. This is where the credit report lists the bankruptcies, judgments, and tax liens that will bring your credit rating crashing down. The fourth section, inquiries, is a list of everyone who’s asked to see your credit report.

Is your credit score is a good one or does it need major repair?

Your credit score is the result of a mathematical formula that combines data from all four sections of the credit report, in order to suggest the possibility of a borrower falling delinquent in the next 24 months. Consumer lenders and bankers use your credit score to estimate the likelihood that you’ll pay your bills on time. As just an example, a FICO score generally ranges between 300 and 850. Any score that tops 750 is considered a good credit risk, while a score below 620 is considered risky. Of course, each lender decides for their own institution whether or not to lend to people with scores between thee two numbers.

Will credit score monitoring hurt my credit?

Not really. First of all, every consumer has the right to look at their credit report, without any effect to either their credit or their credit score. When you request your credit report, it isn’t the same as if a finance company requests your credit report. Your request is called a ‘consumer pull’ and has no effect on your credit whatsoever. It’s only when you ask a possible creditor to inquire, that it can affect your score negatively, because of the implication that you’re planning to open new lines of credit.

Will credit score monitoring help my credit?

Not really. But knowing your credit score will let you stay on top of your credit. Your credit report changes over time, and your credit score will also fluctuate. If you are signed up for a credit score monitoring service, you’ll have a better sense of whether you qualify for credit, and what rate you’ll receive. And, if someone else has taken credit in your name or you have reason to suspect that you’ve become the victim of identity theft, credit score monitoring will let you know much sooner.

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