Personal Debt, Part 1
You could spend all day on the Google reading up on credit scores and how it all works. I’m going to give you a very high altitude view of it for the sake of sanity. If you do want to dive down that rabbit hole there is plenty of information out there about this
So, what the heck is a credit score, anyway?
Sometimes referred to as a FICO score, your credit score is a mixture of credit factors that combines into an overall number. This number is anywhere from 150 – 950, though most credit bureaus and rating agencies range from 300 – 850. This score helps determine if you qualify for a loan or line of credit. Once that hurdle is crossed, it then determines what interest rate you are assigned. Using your score in combination with your income helps decide how much credit you receive.
The good factors – accounts you have paid as agreed – will stay on your report for 10 years after the last activity was recorded. The negative factors – accounts that have delinquencies, non-payments, and other not so great behaviors – usually stay on your report for seven years after the account first became delinquent. Bills that enter into collections are also reported as negative factors on your credit.
Lenders and creditors use your credit score as a means to determine what level of risk you are as a borrower. Occasionally, businesses will use your score when you apply for housing or a job. The higher your score, the better you look as a credit risk.
The three credit bureaus and FICO
There are three major credit bureaus who report about your credit: Experian, Equifax, and Transunion. These bureaus get information from your creditors (credit card, auto loan, home loan, and any other company through which you have a line of credit or loan), and public information (court and property records).
FICO is another beast unto itself. FICO stands for Fair Isaac Corporation and is the most widely used score when creditors assess your creditworthiness. FICO does not rely solely on your credit history and public information as the three bureaus do. It also is not a credit reporting agency. FICO uses the scores from one bureau and combines that with additional data to get your FICO score. Those additional factors are payment history, debt owed ($ amount), age of credit history, new credit and inquiries, and your credit mix (different types of credit).
Action item: Know your score
If you already know where your credit stands - great! For those who don't, I recommend you download the Credit Karma app. This is a free service that will really help you get a handle on your credit health. The user interface is pretty good, too! I get no benefit from this recommendation - it is a tool that I use myself and have gotten great value from. You can also request a free credit report once per year from annualcreditreport.com.
What you’re aiming for with your score is as high a number as possible. The Russell Westbrook of credit scores. In Part 2, we will discuss things you can do to improve your credit score. This will be sort of an abstract view. Following posts will delve into more detail and actionable items. Small bites with this monster, friends! As always, you can lob questions about this and anything else my way at firstname.lastname@example.org or @foldedowl on Twitter.