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Credit Issues

FICO Score: Credit Scoring Basics

Is your credit score really that big a deal? It sure is.

Your credit score is a number developed through a mathematical formula that predicts how likely you are to pay your bills. Rather than depend on subjective assessments of borrowers by lenders, a credit score gives a relatively objective measurement of what kind of borrower you are and will be.

In short, the higher the number, the better you look to lenders, and the better interest rate you will receive on loans. Scores run from 300 to 850, and the vast majority of people have scores between 600 and 800. A score of 720 or higher will get you the best interest rates on loans.

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Who does your credit score matter to besides lenders and credit card companies? More people than you might think. Whether you're renting an apartment, buying cell phone service, applying for a job that involves money handling or other sensitive tasks, or need to get utilities connected, your credit score will probably be examined.

What goes into your credit score, also known as a FICO score? Over 20 factors go into creating your credit score, separated into five categories that carry different weights:

• How you pay your bills. Paid all your bills on time? Great. Paid them late, or had them sent to collections agencies? Bad.
• Amount of money you owe and available credit. A lot of debt doesn't necessarily mean a low score. However, if you max out your balances, you are viewed as a risky borrower. Those who use credit sparingly have the highest credit scores.
• Length of credit history. Had credit for a long time, particularly with the same credit issuers? Your score will be higher.
• Mix of credit. If your credit reflects a mix of credit cards with mortgages and car loans, your experiences are valued more highly and you are considered a good credit risk.
• New credit applications. If you repeatedly seek new credit to negate the effects of late payments or collections bills, you're viewed as a risk.

It's just as important to know what doesn't count in your credit score. This includes:

• Age
• Race
• Job or length of employment
• Income
• Education
• Marital status
• Refusals for credit
• Length of time at your current address
• Renting vs. owning a home

Are you considering a major financial move, such as buying a house or car? This is the time when your credit score will be extremely important, and when you should check your status. Borrowers are now entitled to one free credit report a year through each of the three main credit agencies: Equifax, TransUnion and Experian. (A link to the only official portal to these free reports is at the end of this article) Viewing your credit report through each agency is recommended, as scores may vary slightly by agency. Usually, the median score between the three agencies is used by lenders to make decisions.

Check your credit report not just for the numerical score, but what goes into that score. Credit reports can be based on inaccurate information, and directly influence whether or not you get that loan. Plan on checking your report three to six months prior to a major loan application, allowing you time to make corrections if necessary.

Review your credit report to ensure all the following information is correct:

• Name (or names in case of marriages)
• Social Security Number
• Date of Birth
• Addresses, past and present
• Employers, past and present
• Accounts, past and present
• Time-sensitive material (bankruptcies must be removed from your credit history after 10 years, and suits, judgments, arrest records and other unfavorable information must be removed after seven years)

Don't fall in the trap of taking faulty moves to improve your credit. Some dangerous myths exist on how to increase your score that in fact have the opposite effect:

• Closing extra accounts. This will not help your credit score, and may hurt it. It may make your credit history appear shorter than it is, or make your balances versus total available credit look risky.
• Avoid checking your score. Some people think checking your credit adversely affects your score. Not true.
• Avoid credit counseling. Like some advice but worried it will appear on your credit report and hurt your score? Credit counseling is information that appears in the “doesn't matter” column.