Understanding Your Credit Score
Most people these days realize that their entire financial history is chronicled in a detailed credit report. Almost 70% of people, however, don’t realize that the information that those detailed credit reports contain is then calculated into a three digit credit score. You can have a pretty good repayment history on a lot of items, but it doesn’t take too many negative reports on your credit report to make your credit score drop like a heavy rock thrown into a pond. In fact, some negative events can take up to 160 points off of your credit score. That’s definitely something that you don’t want to have happen to you without your knowledge… right? But that can happen to you if you don’t realize the importance of your credit score.
Why is Knowing Your Credit Score Important?
There are two important reasons why it is important to know what your credit score is at minimum on a month-to-month basis:
because lenders will generally grant new lines of credit based off of your credit score & not off of your credit report; and
knowing what your baseline score is will help you be able to determine if an identity thief is prowling around.
Your credit score, which is a number that falls between 300 – 850, is a gauge on the overall health of your financial decision-making. A higher credit score will bring you better interest rates, friendlier repayment terms, and the ability to borrow more money. A lower credit score can result in higher interest rates, rigid repayment terms, and potentially a lack of ability to borrow any money whatsoever.
What is a Good Credit Score?
So what is a good credit score? Anything over 650, as for a vast majority of lenders, this is the number where better rates and terms come into play. Yet remember – a perfect score is 850, so there is 200 points of improvement to be made. The good news is that the average credit score in the United States is 720, so you’ve likely got good credit and you don’t even know it.
When an identity thief strikes by opening up new lines of credit, maximizing those credit lines, and then failing to pay anything on them, your credit score will go down. If an identity thief gets a mortgage in your name that is then foreclosed upon, your credit score could go down as much as 160 points. A false bankruptcy in your name because of an identity thief could result in a credit score reduction of 100 points. That’s why detecting any fluctuation early, even if only a point or two, is so critical to preventing the damage that an identity thief can do.
What Makes Up a Credit Score?
Knowing what makes up your credit score helps you to be able to know how you can improve it… and know where identity thieves might be chipping away at you if your score is dropping unexpectedly.
35% Payment History: Having a history making of payments on time and not having any missed payments on all of your credit lines is one of the most important items lenders look at on everyone’s credit history.
30% Amount Owed: This looks at the amounts you owe in relation to the total amount of credit that is available to you. People who are closer to maxing out all their credit limits are deemed to have a higher risk of making late payments in the future, and this can lower their credit score. Not having any credit activity on open credit lines for a lengthy period of time can have the same effect.
15% Length of Credit History: A credit report containing a list of accounts opened for a long time will always help your credit score. Having a lot of new accounts opened in the last few months will not.
10% New Credit: Opening several new lines of credit in a short period of time can lower your credit score twice. Multiple credit report inquiries can represent a greater risk because it appears that you may be attempting to obtain new credit, 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 credit score counts multiple inquiries in any 14-day period as just one inquiry instead of multiple inquiries.
10% Types of Credit in Use: Is all of your credit in credit cards? Or do you have a mortgage, a vehicle loan, a department card, & a couple credit cards? More variety will equate to a higher credit score.
How Can You Monitor Your Credit Score?
There are two very easy ways to monitor your credit score. You can:
sign up for an identity theft protection service plan that includes credit score monitoring; or you can pay one of the three major credit bureaus to access your credit score and your credit report.
Now some states do offer their residents the ability to access their credit score for free, in addition to the free credit reports that you are entitled to under Federal and State laws. Be sure to check your local resources to determine what kind of products are available in your area and what you may need to do to be able to access them.
By monitoring your credit at least monthly, you’ll be able to tell if your credit score is doing something that it shouldn’t be doing, and knowing what makes up your credit score can help you to boost it higher. Identity thieves are counting on the fact that you don’t know this information… but they do.
Mike Carter writes about consumer credit for SIF. He has been a speaker at Financial Freedom Summit in California. His work has appeared in The New York Times, Washington Post, Los Angeles Times, MarketWatch, USA Today and MSN Money, and on the Associated Press wire. At one point he held a perfect 850 credit score and he is a serial mortgage refinancer.