Know Your Score
Your credit report includes all the data available regarding your credit cards, loans, mortgages, etc., but it doesn't include a piece of information which may actually have the most influence on whether you will be approved for a loan or credit card and under what terms¡ªyour credit score. That is because different companies produce different scores from your credit report using different formulas.
Your credit score is determined by a complex mathematical formula that synthesizes all the information contained in your credit report and calculates it into one number¡ªusually between 300-850. The higher your number¡ªor score¡ªthe less investment risk you pose in the eyes of potential lenders or creditors. Your score may be slightly different depending upon which credit agency is doing the calculations (remember, each credit report from each company may also be slightly different), but in general, they will be within a few "points" of one another.
While you are entitled to one free credit report per year under the Fair and Accurate Credit Transaction Act, you have to pay a nominal fee to obtain your credit score from each of the three credit reporting agencies or from Fair Isaac (www.myFICO.com
. Again, your credit score is not automatically included in your credit report.
How is Your Score Calculated?
The formula is complex and a trade secret, but basically, points are awarded or deducted towards your score in a number of key areas, including your bill-paying history; the number, type and longevity of your loans or credit cards; any collection actions taken against you; and how much total outstanding debt you may have. Late payments have a negative impact on your credit score, as do any tax liens or other outstanding legal judgments against you. Other factors that may influence your score include:
- Lots of high credit card balances (more than 50 percent maximum credit limit)
- Too many new accounts opened in the past year (this may indicate you owe too much money or can't pay off your debts)
- Not enough credit (short credit history)
- Too many inquiries on your credit report (remember, these generally remain on your report for two years per inquiry)
What Your Credit Score Does Not Include
- Race or color
- Ethnicity or national Origin
- Marital status
- Political affiliation
The credit score calculation also does not take into account your monthly or annual income, whether you have a job, your current bank account holdings, or the down payment you have made on your mortgage.
Improving Your Credit Score