Keeping Watch On Your Credit Score
Can Be Very Rewarding
Monitoring your FICOŽ credit score can lead to big savings in
interest and greatly increased purchasing power.
A higher credit score typically means lower interest rates
which will reduce your monthly payments – and that could mean
saving thousands of dollars over the life of a loan.
What factors determine my credit
score?
The exact formula of the FICO and other
scoring models is a trade secret. However, Fair Isaac has
identified five factors and the importance given to each factor.
Other scoring models include most of the same factors. However,
the weight given to individual factors may vary.
The five are (www.myfico.com/CreditEducation/WhatsInYourScore.aspx):
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- New credit – 10%
- Types of credit used – 10%
It's clear that the single most important
factor is your record of paying your bills on time. The number of
delinquent accounts and the length of time the account went unpaid
also factor into the calculation. Your payment history may also
include financial problems that have ended up in court such as
bankruptcy or judgments entered against you.
Over five years ago I had several
late payments due to an illness. Will this affect my score?
Yes, but not as much as a recent late
payment. Negative information can remain on your credit report for
seven years, and this information will be calculated into your
score as long as it appears on your credit report.
However, the more recent the late payment,
the more it will detract from your score. In addition, the longer
a debt goes unpaid and the more accounts that show a history of
late payments, the more points will be subtracted from your total
score. For example, if your credit report shows several accounts
that were 120 days past due, this is far more damaging to your
score than one account that was 30 days past due.
Does the calculation include only
negative information?
No. The number of accounts shown on your
credit reported as “never late” or “paid as agreed” have a
positive effect on your credit score. It just seems like the
calculation is based only on negative factors.
Often negative information is reported
without a corresponding report of positive information. Utility
companies are a good example of this. You are not likely to get
positive points for paying your electric bill on time, but the
utility company late payments will negatively impact your score.
Parking tickets or even library fees may show up on your credit
report. But, you won't get extra points for being a good driver or
responsible library patron.
Does my credit card company have
to report on-time payments to the bureaus?
There is nothing in the FCRA that requires
any company to report either positive or negative information. If
a company you do business with does not report to at least one of
the three national credit bureaus, contact the company and ask
that your good record be included in your credit report.
Also, some companies that report on-time
or late payments may not report the maximum credit available. The
ratio of credit used to credit available factors into your score.
If you use credit wisely and don't spend to the maximum limit, you
deserve the benefit of this positive data.
If companies you do business with refuse
to report to one or more of the credit bureaus and/or do not
report the maximum credit available, take your business elsewhere.
And let them know why you are moving on. Companies who lose
customers because of their irresponsible business practices need
to hear from you.
Does it improve my score to pay
off my credit card balance every month?
Not necessarily. Points are given or taken
away based on the amount of available credit used. Certainly,
using the maximum amount on your credit card and paying only the
minimum each month can lower your score. But, using a large
percentage of your available credit each month, even when you pay
the bills faithfully, can detract points if you are carrying a
high balance at the time your credit history is scored.
Remember, the credit score is a snapshot
of your credit report on any given day. Most credit card companies
and other lenders report to the credit bureaus every 30 days. If
your credit report is scored right before your monthly credit card
bill is due and you've used a significant portion of your
available credit, your score will go down.
Why do I have a different score
from each credit bureau?
There may be a number of explanations for
varying scores. Not all lenders report to all three credit
bureaus. A late payment reported by a credit card company to only
one bureau would lower your score on that bureau's credit report.
Also, until recently, each credit bureau used its own variation of
the FICO model. Even slight deviations could end in a different
score. As discussed in
Part 3 of this guide, with the VantageScore the three national
bureaus now use the same scoring model.
A 2002 study conducted by the Consumer
Federation of America and the National Credit Reporting
Association examined the reasons for different scores at the three
national credit bureaus. In addition to different reporting
practices by lenders, the study found that consumers sometimes
have multiple or mixed credit reports. This may be explained by
variations of names used on credit applications or by credit files
that include information about more than one consumer.
www.consumerfed.org/pdfs/121702CFA_NCRA_Credit_Score_Report_Final.pdf
How do the types of loans I have
affect my credit score?
Major bank credit cards with good payment
records are better for your score than a department store card.
Loans or credit established with a finance company, even when you
have a good payment record, do not carry as much weight as a major
bank card. A major bank card says you are in the mainstream of
credit where credit limits can reach the stratosphere with a good
payment record.
A revolving credit card such as with a
department store generally carries a very low credit limit. One
who seeks credit from a finance company may be considered in the
high-risk category and ineligible for the mainstream credit
market. Installment loans such as car loans and mortgages have a
positive effect on your credit score although a high loan
balance-to-value ratio can detract from your score.