Personal finance: Understanding your credit score
If you have been in the market for a car or home loan lately, odds are somebody ran a report “to see how good or bad your score is,” said Alicia Adamczyk in Lifehacker.com. Although credit scores as we know them have been around for less than 30 years, their importance has grown immensely, determining whether you can rent a home, land a job, or even get an upgrade from your smartphone carrier. Two scoring models dominate today’s market: FICO and VantageScore. Both assign you a number between 300 and 850, with 750 and higher typically qualifying you for the most coveted lending rates. Three credit agencies—Equifax, Experian, and Transunion—gather “different information on you at different times” to create the scores, and lenders typically “decide which score they want to use,” though nearly 90 percent go with FICO. There are different models for different kinds of loans, which is why the score “Lender A receives for your mortgage application may be different from the score Lender B receives for an auto loan.” Whatever your current credit score, “you might not keep it long,” said Liz Weston in the Los Angeles Times. The figures “fluctuate all the time,” based on the changing information in a person’s credit file.
The fact that there are so many credit formulas is the main reason there’s so much confusion about how to improve a mediocre score, said Miriam Cross in Kiplinger.com. Both FICO and VantageScore “prize on-time payments above any other factor.” Don’t worry too much if you are just a few days late: “Lenders typically don’t report a late payment to the credit bureaus until it’s more than 30 days overdue.” If you do pay that late, it “won’t haunt you forever” if you consistently pay bills on time afterward. Consideration is also given to what you owe on your cards in proportion to each card’s credit limit, as well as your overall credit card debt. “The age of your oldest account and the average age of all your accounts” are also factored in.
“If you’re reading all of this and feeling nervous about your own credit score, take a deep breath,” said Anna Johansson in NBCNews.com. With some patience, you can “revise and improve it.” First, determine your score’s “weak point.” Is it high credit card debt or perhaps a few missed payments? Almost everything “can be corrected with better habits in the future.” Avoid applying for new cards or taking on new debt for now. New applications “tank your score even harder,” by reducing the average age of your credit history. Set a budget and methodically pay all your bills on time, and do whatever it takes to shrink your debts. Consider cutting expenses, looking for extra income, and trying to negotiate with your credit card company for a lower interest rate. “Once your debt totals start decreasing, you’ll feel happier and more optimistic.” ■