Do you know your credit score?
Experian recently became the first of the three credit bureaus to sell their jointly developed credit score, called VantageScores, to consumers.
Consumers can pay $5.95 to view their Experian VantageScores online, but the scores won’t have much value unless lenders start using them to make credit decisions.
Credit scoring applies a mathematical formula to the information in a consumer’s credit-bureau file to predict how likely the consumer is to fall behind on debt payments. The higher the credit score, the lower the presumed likelihood of default.
Most lenders use credit scores to help decide whether they want to make a loan and, if so, at what interest rate. Some employers use credit scores in their hiring decisions, most frequently for jobs that involve money. Some insurance companies use credit scores to assess a customer’s likelihood of filing a claim.
Fair Isaac Corp. pioneered credit scoring, and its Fico scores are the industry standard.
The credit bureaus say their new VantageScores will provide better, more consistent results than Fico scores. That remains to be seen. What they are sure to cause is more confusion.
Fico scores range from 300 to 850. VantageScores range from 501 to 990 with letter grades. A score of 900 and up equals an A while 600 and lower is an F.
Each credit bureau sells, in addition to Fico scores and VantageScores, proprietary scores with their own names and numerical scales. Each credit score depends on two things: the underlying information on which it is based and the formula applied to that information.
Because some lenders report information to some bureaus but not others, a consumer’s credit file often differs from bureau to bureau.
Neither Fair Isaac nor the bureaus will say exactly how they calculate credit scores. The most important component in both scores is your payment history.
Most creditors — including mortgage and credit card companies, retail stores and auto lenders — report their borrowers’ activity to one or more bureaus.
“You get positive points for a long history of timely payments. You get negative points if you are late,” says Fair Isaac spokesman Craig Watts.
A payment is considered late when it is more than 30 days overdue. The longer it goes past 30 days, the bigger the hit to your credit score.
The longer your credit history, the better your score. If you want to close a credit card, close your newest ones first.
Another important component in both formulas is credit utilization, or how much of your available debt you are using. For revolving debt, this is calculated by dividing your current balance by your credit limit. In general, the lower this number, the better.
It’s usually better to use half of your credit limit on two cards than all your limit on one.
Both systems also look at how much debt you have. A large balance “could be positive or negative depending on your history,” says Watts.
Remember, lenders like you to take on debt; that’s how they make money. But they don’t want you to take on so much you can’t repay it.
- Summarized from What’s The Score, by Kathleen Pender, San Francisco Chronicle, via the Detroit News
How Your Credit Score is Calculated
VantageScores rates you credit score between 501 and 990 and uses corresponding letter grades:
A: 901-990 (Super Prime)
B: 801-900 (Prime Plus)
C: 701-800 (Prime)
D: 601-700 (Non-Prime)
F: 501-600 (High Risk)
VantageScores calculates your credit score according to this formula:
32 percent — Payment history
23 percent — Utilization (percentage of available credit used)
15 percent — Size of outstanding balances
13 percent — Length of credit history and types of credit
10 percent — Number of recently opened accounts and inquiries
7 percent — Amount of credit available
Fico scores you in a range from 300 to 850, depending on the lender and credit bureau.
Best:: 850
Worst: 300
Average: 723
Fico calculates your credit score according to this formula:
35 percent — Payment history
30 percent — Amounts owed
15 percent — Length of credit history
10 percent — New credit
10 percent — Type of credit
Check Your Credit Report
The Federal Trade Commission has informaton on how to access your free credit reports
The FTC also issues a warning:
A Warning About “Imposter” Websites
Only one website is authorized to fill orders for the free annual credit report you are entitled to under law – annualcreditreport.com. Other websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached. For example, some sites sign you up for a supposedly “free” service that converts to one you have to pay for after a trial period. If you don’t cancel during the trial period, you may be unwittingly agreeing to let the company start charging fees to your credit card.Some “imposter” sites use terms like “free report” in their names; others have URLs that purposely misspell annualcreditreport.com in the hope that you will mistype the name of the official site. Some of these “imposter” sites direct you to other sites that try to sell you something or collect your personal information.
