Commercials stress its importance, and applications for loans, apartments, and even jobs constantly request for it: your credit score. This number holds tremendous sway over your financial options. Everyone cautions you to not to do anything that will jeopardize your score and reminds you to do all you can to keep it high. You know that the score is meant to reflect whether you are a good credit risk, but what goes into a credit score? And, essentially, what can you do to keep your score as sound as you can?
Credit Bureaus and Reporting
The three chief credit bureaus are TransUnion, Equifax and Experian. Their job is to create a report about your financial behavior. Included in these reports are most sources of debt – credit cards, loans, etc. – that disclose information about the amount of your debt, whether you have late or missed payments, how much credit you have available, and what kinds of credit lines you have open. Some other sources like utilities and rentals may be included but typically only for an overdue payment that results in third-party action.
Once the report is ready, the credit bureaus use credit scoring services to read the report and calculate your credit score. Created in 1989 by FICO, FICO Scores is the most commonly used credit scoring service, so common that a credit score is often referred to as FICO score. While FICO’s credit score calculator formula is a closely guarded secret, the major components in the calculation are known.
Another huge player is VantageScore, developed by the three chief credit bureaus. Since its inception in 2006, VantageScore continues to see wider use with its most prolific users being credit card issuers. VantageScore differs from FICO Score by its calculation’s major components and how they are weighted.
On top of differences in their calculations, credit scoring services also use different score ranges when calculating your credit score. Furthermore, if you have checked your credit reports from each of the three bureaus, you will see different credit scores on each because each major credit bureau differs in the information they collect.
Your Role in Securing the Best Possible Credit Score
Now that you know how your credit score is calculated, how do you position yourself to achieve and maintain a good score? Here are some ways you can impact your score.
- Your payment history weighs the most in formulating your credit score. Making sure that payments on credit accounts are always on time has the greatest impact on your score.
- Track how much available credit you have and how much you owe compared to your income. A high credit utilization rate, or having too much debt compared to your income or available credit, can be interpreted as a sign of problems managing your debt.
- Avoid multiple hard credit checks within a short period of time. When you apply for credit such as a credit card or loan applications, a “hard” credit check temporarily lowers your score because you are increasing your credit risk. Therefore, multiple inquiries can add up to a dramatic reduction in your credit score. Rate shopping is an exception to this rule as the credit scoring services treat these types of inquiries as showing financial responsibility.
- Review your credit reports annually. While a lot of credit inquiries are detrimental to our credit scores, the Federal Trade Commission maintains that you have the right to claim a free copy of your credit report from each of the three bureaus once every 12 months. Doing so will not reduce your score. While reviewing your credit reports, look for errors and fraudulent information. If you discover unauthorized inquiries, you have the right to dispute them with the credit bureaus. Unauthorized credit inquiries may also indicate identity theft.
Your credit score is a reflection of your financial responsibility. You can have a positive effect on your credit score, and your credit union is here to help you with information and guidance.
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