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(From WGME-TV) – Questions about credit scores are often a top search online in our area.
What is a credit score, how is it calculated, and why does it matter?
Think of a credit score like this — it’s essentially your credit history expressed in a number. It can be anything from 300 to 850. The better your credit, the higher the score.
FICO is the most popular credit scoring model, used by about 90 percent of the top lenders.
There are the five main scoring ranges. Poor is anything below 580, and exceptional is anything 800 and above.
You could also be in the fair, good, or very good range.
Or perhaps if you’re young, new to the US, or have a thin credit file, you may not have a score at all.
“You can think of it like a grade on how we’ll you’ve been managing your finances,” said Jen Burke with the Maine Credit Union League. “You want to continue to look where your numbers are, always try to improve upon them.”
So, what’s the big deal? Does the score really matter?
Why your credit score matters
Your credit score is basically your credit history expressed as a number. The higher the score the better.
For example, a person with a score of 837 is going to have a much easier time getting a credit card, mortgage, or car loan, and a decent interest rate.
Experts say you could start having problems if your score dips below 650. And it’s not just about getting a credit card or loan.
It does, and can affect everything from getting a car, cell phone, even a job and housing.
A study found 47 percent of employers used credit checks in the hiring process.
It effects your car insurance, too. Consumer reports say even those with good credit could be paying hundreds more a year than those with excellent credit.
And landlords say a credit check is a top factor.
“So, if a landlord pulls your credit report and sees you’ve got a bad payment history, a low score, they may not rent to you. So, it’s really important to build good credit,” Burke said.
How a credit score is calculated
You may not think much — or at all — about your credit score until you want to get a credit card, cell phone or maybe a mortgage, but the score can have a big effect on your life — from interest rates to even getting a job.
So, as you’re walking around — think of it like this, everyone has a number. And maybe you’re a person with a score of 350. That’s pretty much as bad as it gets.
So, what happened?
FICO calculates scores and breaks it down like this. The biggest factor — 35 percent — payment history.
Lenders want to know if you’ve paid past credit accounts on time so they can figure out how risky it is when extending credit.
The score also looks at length of credit history, credit mix, and amounts owed.
“Using the formulas, the credit reporting agencies use, and the credit scoring uses, never let your credit card balance exceed 1/3 of the credit limit,” said David Leach with the Bureau of Consumer Credit Protection
So, if you have a $6,000 credit card limit, try not to charge more than $2,000 at a time.
How to fix a credit score
First thing to know, unfortunately, there’s no quick way to fix a credit score.
FICO, the most popular credit scoring company, says repairing or building credit will take patience and discipline.
Say you’re someone with a score of 665. That’s considered a *fair* score, but you want to move up to good or exceptional.
- Pay bills on time — this is the biggest factor in your score calculation.
- Reduce the amount of debt you owe — keep balances low on credit cards.
- Don’t open a lot of new accounts too quickly — that will lower your average account age, which is risky.
- Check for mistakes on your credit report.
“One out of every three credit reports contains an error, and sometimes those errors are negative. They’ve confused one person’s file with another or under fair credit reporting, bad credit can only stay up for only seven years and sometimes these bad trade lines are still on there,” said David Leach with the Bureau of Consumer Credit Protection.
Federal law says you can get a free credit report from each of the bureaus every year so you can check for mistakes.