Join the Money Funnies as they break down credit scores, credit reports and credit bureaus.
A credit score is a number that’s supposed to represent how much of a credit risk a person is based on their previous financial behavior. Credit bureaus keep track of how much debt you have and how often you pay your bills on time, and put the information in a credit report. The credit score is a number representing whatever’s in that report.
In other words, credit reports show your previous financial behavior, such as payment history. That information is used to create a number, called a credit score, to show how you are likely to behave in the future.
Then other companies – for example, when you want to get a new cell phone contract – can ask for that information, which is supposed to tell them how likely you are to pay your bills.
Credit scores affect a variety of things – the size of loans you can get, what the interest rate on those loans is, insurance premiums, cell phone plans and more. They can have great impact on your financial life.
Who keeps track of that?
In the US, there are three main credit bureaus that track the information and create reports: Experian, TransUnion and Equifax. Credit Bureaus build credit reports and use the information to create a credit score.
There are different methods for calculating the scores, but the most common is called FICO. FICO stands for Fair Isaac Corporation, who developed this method.
Getting your information
You are entitled to one free credit report a year and one within 60 days of any “adverse action” like being denied credit. The three credit bureaus operate a website called AnnualCreditReport.com for people to access the reports.
You should check those reports regularly to make sure there are no mistakes in them.
The free reports unfortunately don’t include your credit score. You usually have to pay for that as an add-on. Your bank or credit card company may provide you a credit report and/or credit score for free as a perk for using their service.
Scores
Credit scores range from 300 to 850. A good credit score, according to FICO, is 670 and above. It’s important to note that you may have different credit scores from the different credit bureaus, as they may value behavior differently, but they are usually close.
According to Fico, these are the guidelines for credit scores:
| 300-580 | Poor |
| 580-669 | Fair |
| 670-739 | Good |
| 740-799 | Very Good |
| 800-850 | Exceptional |
How can I improve my score?
The main things that impact your credit are your payment history, the age of your credit accounts and the amount of debt you have. Income and employment do not impact your credit score.
A big issue for younger people can actually be just a lack of credit history, not having enough experience in paying for accounts in your own name to develop a record.
But missed or late payments anytime will hurt your score, especially if they happen often. Paying bills on time is important.
Not having too much debt, especially credit card debt also helps bolster your score. But, interestingly, have been extended credit by a bank or credit card company but not using too much of that credit also helps.
The credit bureaus keep track of the ratio of the credit you’ve been offered vs the credit you are using. It’s called the credit utilization rate, and you want to keep it as low as possible.
For example, say your credit card limit is $1000 and you don’t have any other debt. If your credit card balance is $200, your credit utilization ratio is 20%.
Credit scores are impacted by payment history, how much credit history you have and your outstanding debt but not income or employment history.
Credit reports and scores can be a bit controversial, since they impact so many areas of your financial life. But understanding them is an important step to controlling them and developing a path to a stable financial future.