Understanding Your Credit Score

And How To Boost Those Numbers

You may ask, “If I know what's on my credit report, why do I need to know my credit score?” The answer is easy.

Martin says, "Over 75 percent of mortgage lenders and 80 percent of the largest financial institutions use FICO scores in their evaluation and approvals process for credit applications."

While credit reports are a laundry list of your credit accounts, payment history and other information, your credit score - typically called a FICO score, named after the company that developed it, Fair Isaac & Company - is one number between 300 and 850. The higher your number, the better the chance you will make your loan payments and make them on time, lenders believe. It's much easier for lenders to look at this number than cull through your credit reports to come up with their own risk evaluation.

Although banks and other financial institutions have been using FICO scores for years, only in the past two years has the individual been allowed to learn his score. FICO resisted releasing scores for some time, afraid that consumers would use the data to artificially inflate their scores and thus make them less useful. However, pressure from Congress and consumer groups has changed that. But to most people, the revelation that they even have a FICO score is still news.

To clarify, other companies can provide you with their own versions of a credit score. However, FICO scores are above and beyond the most-used score. FICO is so big that it's used interchangeably with the term "credit score." Most people call credit scores a FICO score. Other companies' numbers can give you a sense of how your credit is viewed by lenders, but if you really want to know how lenders see you, you need to check your FICO score.

What's in a score?

About 60 percent of people have credit scores of 700 and above. The best number to have is 720 or above. If your score is 720, there's really no need to try to raise it because lenders lump you in the same category as folks with a score of say 800 or 820. At 720, you are viewed as a safe risk and typically receive a loan without problem and at a low interest rate. However, if your number is below 700, it's definitely worth your time to try to pump it up.

Here is how Martin explains a FICO score is determined:

35 percent Payment History: "Having a long history making of payments on time and no missed payments on all credit accounts is one of the most important items lenders look for."

30 percent Amount Owed: "This measures the amount you owe relative to the total amount of credit available. Someone closer to maxing out all their credit limits is deemed to be a higher risk of late payments in the future and this can lower their credit score."

15 percent Length of Credit History: "In general, a credit report containing a list of accounts opened for a long time will help your credit score. The score considers your oldest account and the average age of all accounts."

10 percent New Credit: "Opening several new credit accounts in a short period of time can lower your credit score. Also multiple credit report inquiries can represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. Also, to compensate for rate shopping, the score counts multiple inquiries in any 14-day period as just one inquiry."

10 percent Types of Credit in Use: "Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered."

How to get your FICO score:

Everyone wants to sell you a comparison of your three credit reports from the three main companies: Experian, Equifax and TransUnion along with your FICO score.I would recommend that you contact your money broker and see if eh will get it for you for free.

Boosting credit scores:

Although you can't raise your score overnight, you can do so fairly quickly. The scoring formula gives more weight to recent activity. So, even six months of "good behavior" will have an impact, demonstrating that you have cleaned up your act.

Because payment history comprises the largest part of your FICO score, making a habit of paying bills and other payments on time is obviously going to have the largest positive impact.

However, the fastest way to improve your score is to pay down balances. This lowers the amount of credit you're using relative to how much credit you have available to you. Remember, FICO scores reward people who use a smaller percentage of their available credit. Some people suggest never using more than 50 percent of your limit on any card.

Avoid opening a lot of new accounts at once - this makes lenders queasy - particularly if you don't have a long credit history. Many recommend not having more than five credit cards. If you decide to close some credit accounts, close the newer accounts first. However, don't close more accounts than necessary because this lowers your ratio of debt to available credit.

Rotate and use all of your cards - a dormant credit account will not help your score. If you do have a late payment, it's worth a call to the lender to see if they will remove this information from your records in a "goodwill adjustment." You can choose to dispute the late payment report. While it's in dispute, the item will stay on your credit report but not factor into your FICO score.

While there's no question that having a good credit score is essential, it's also important to point out that FICO scores do not take your age, income, assets or employment history into account. Specific lenders may pay closer attention to income, assets and employment history. Also, FICO scores treat all late payments equally. However, an auto finance company, for instance, can look at customized scores tailored for their industry. If you've been late on credit card payments but never missed a car payment, they may take this into consideration.

1. The next time you order checks have only your initials (instead of first name) and last name put on them. If someone takes your checkbook, they will not know if you sign your checks with just your initials or your first name, but your bank will know how you sign.

2. Do not sign the back of your credit cards. Instead, put PHOTO ID REQUIRED.

3. When you are writing checks to pay on your credit card accounts, DO NOT put the complete account number on the "For" line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check-processing channels will not have access to it.

4. Put your work phone # on your checks instead of your home phone. If you have a PO Box, use that instead of your home address. If you do not have a PO Box, use our work address. Never have your SS# printed on your checks. You can add it if it is necessary. However, if you have it printed, anyone can get it.

5. Place the contents of your wallet on a photocopy machine. Do both sides of each license, credit card, etc. You will know what you had in your wallet and all of the account numbers and phone numbers to call and cancel. Keep the photocopy in a safe place. Also carry a photocopy of your passport when traveling either here or abroad.

6. When you check out of a hotel that uses cards for Keys, do not turn the "keys" in. Take them with you and destroy them. Those little cards have on them all of the information you gave the hotel, including address and credit card numbers and expiration dates. Someone with a card reader, or employee of the hotel, can access all that information with no problem whatsoever.

Here is some critical information to limit the damage in case your credit cards are stolen:

1. If stolen cancel your credit cards immediately. The key is having the toll-free numbers and your card numbers handy so you know whom to call. Keep those where you can find them.

2. File a police report immediately in the jurisdiction where your credit cards, etc., were stolen. This proves to credit providers you were diligent, and this is a first step toward an investigation.

3. However, here is what is perhaps most important of all. Call the three national credit reporting organizations immediately to place a fraud alert on your name and Social Security number. The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit.

Here are the numbers you always need to contact about your wallet contents being stolen:

1.) Equifax: 1-800-525-6285
2.) Experian (formerly TRW): 1-888-397-3742
3.) TransUnion: 1-800-680-7289
4.) Social Security Administration (fraud line): 1-800-269-0271

Disputing and correcting a mistake on a credit report

Statistics show that 70 percent of credit reports contain serious errors that might cause consumers to be denied credit cards, car loans and even mortgages. The good news is that the Fair Credit Reporting Act requires credit-reporting agencies to fix these mistakes. But it takes your diligence to make sure it happens.

The first step is locating any discrepancies in your report. Even the smallest error could seriously dent your credit chances. If you find a mistake, immediately bring it to the credit agency's attention. Remember, there are three credit reporting services -- TransUnion, Experian and Equifax -- so you need to check, and correct, the record held by each.

The links in the letter below will take you to each credit agency's Web page, where you can find details on how to obtain a copy of your credit report. The letter also details what information is needed to successfully correct your mistaken report. Send a separate letter to each agency where a mistake is found. Be sure to explain the situation in detail and include a copy of the credit report with the faulty information highlighted.

Personalize the letter below by entering your specifics in the areas in red. You can print out this Web page and make your changes by hand or copy the body of the letter and paste it into a document where you can make your changes on your PC.

Date

Equifax Credit Information Services Inc.
https://www.econsumer.equifax.com/consumer/forward.ehtml?forward=home
P.O. Box 740241
Atlanta, GA 30374

TransUnion LLC
http://www.transunion.com/Personal/OrderOtherMethods.jsp
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022

Experian
http://www.experian.com/consumer/index.html
National Consumer Assistance Center
P.O. Box 2002
Allen, TX 75013

Re: Credit report error

Dear Sir or Madam:

I have discovered inaccurate information on my credit report maintained by credit agency name. The report is in my name -- enter your full name here -- and my Social Security number is enter your Social Security number here.

Enclosed, please find a copy of my credit report containing the mistaken data. I have highlighted the errors. Specifically, the following information is in wrong:

The Fair Credit Reporting Act following defines the following as billing errors that must be corrected. Pick those that apply to your situation and detail for the credit bureau what you believe is the mistake. Be sure to list the creditor's name and account number for which the incorrect data appears:

A purchase made by someone other than the account's authorized user or something that you did not buy.

A disagreement between the purchase price and the price shown on the bill.

A charge for a product or service that was not delivered according to agreement.

Mathematical errors.

Questionable items or any entries for which you need more information.

Please investigate this matter with the creditor in question and you should find there is an error. When that is confirmed, please remove this error from my credit report.

In addition, please make this letter a permanent part of my credit record.

If you have any questions about my request or the credit information in question, please do not hesitate to call me at work or home phone number, depending upon when you would prefer to discuss the matter.

Thank you for your prompt attention to my request.

Your Signature
Your Typed Name
Your Address
City, State and ZIP Code

Enclosure: credit report