Question: I have no credit and want to learn about the credit score scale so I can build my credit score.
Philip Tirone: Let’s talk about two things in this article. First, let’s talk about the credit score scale and what that three-digit number means. Then, let’s talk about how get hold of your credit report and credit score.
1. Your credit score is a three-digit number that affects your range of opportunities. A good score increases your opportunities; a poor score limits them. Your credit score determines the type and size of mortgage you get, the availability of credit cards, and even whether you get the job you want. Therefore, you should understand how your score is formulated and what you can do to start moving up the credit score scale by learning how to improve your credit score.
A FICO credit score generally ranges from 300 to 850 and is tabulated by a credit-scoring bureau, all of which create credit scoring systems that takes a look at your outstanding balances, your payment history, and other information to produce a score. The credit-scoring bureaus use a frequently changing formula that predicts like likelihood of a borrower to pay back debts on time and in full.
A borrower who has a score of 720 and above is seen as the least likely to default on payments for a loan or a credit card. Meanwhile, a borrower with a credit score of 620 and below is perceived by creditors as having a high probability of defaulting on a loan. Lenders frequently offer benefits to borrowers with credit scores of 720 or higher, usually better terms on loans and lower interest rates.
People with credit scores of 620 and below are considered subprime borrowers. If they are able to get a loan, it will come with high interest rates and other restrictions. Obviously, these people are the ones who would most benefit from moving up the credit score scale.
More than 50 percent of people have credit scores below 720 or no credit scores at all, according to the Fair Isaac Company. Of this group, 40 percent have credit scores that fall below the 620 threshold.
2. To start moving up the credit score scale, you obviously need to know where you stand. So what is your credit score and how do you get your hands on your credit report?
Be aware that your credit report and your credit score are not the same things.
Your credit report is a listing of all your credit accounts for the past seven years and includes your payment history, address information, and credit inquiries made on your accounts. Your credit score, meanwhile, is a three-digit number based on this information and is produced by a formula applied by the credit-scoring bureaus (namely Experian, TransUnion and Equifax) keeping record of your credit information. This three-digit number tells you where you fall on the credit score scale.
You have many options for pulling your credit report. You can pull it for free once a year from www.annualcreditreport.com. You can also purchase your credit report from the three bureaus or from www.myFICO.com. If you have been denied credit, you can ask the creditor who turned down your loan or credit card application for a free copy of your credit report.
Though your credit report will not include your credit score, you can do several important things with it. Review your free annual credit report for errors. Look for any mistakes or strange information that could be a sign of identity theft or fraud. If you have errors on your credit report, you might be pushed down the credit score scale.
Now let’s talk about credit scores. You will always have to pay for your credit score, usually around $8. Unfortunately, most companies who sell your score online will sell something called a consumer score, which is mostly worthless as creditors ignore this score. The credit-scoring bureaus customize the credit scores depending on who is requesting the score. (A car financing company, for instance, is more interested in your installment payment history than a mortgage lender, who will place more weight on your history of making house payments.) A consumer score is a generic score that no lender is interested in.
Most consider the FICO score. There are only two places to obtain your FICO score: Go to www.720FICOscore.com to get your FICO score from two of the three major credit-scoring bureaus, or obtain it through a lender.
Keep in mind that the latter will hurt your credit score, while the former will not. When a lender or creditor requests your credit score, this is considered a “hard” inquiry and will negatively impact your credit score. Ten percent of your credit score is composed of inquiries made on your credit score. However, when you check your own credit or purchase your score, this is considered a “soft” inquiry and has no effect on your credit score whatsoever.
Knowledge is power. Knowing where you stand on the credit score scale will help you learn which steps you need to take and how to improve your credit score.
