There’s just no denying it. By now, it’s clear to all of us that our modern lives are being monitored. What we do, say and buy; where we live — it’s all out there.
Our financial lives are of particular interest to Big Data. Especially your credit score. It’s one number that invisibly follows you everywhere, impacting your life in more ways than you may imagine. It is the ultimate grade. Here’s how it works and why it matters.
Who is keeping score?
The three big players in the credit score business are TransUnion, Equifax and Experian. They make their money selling your credit information, history and score to banks, businesses and even employers. Your credit report details your payment history, the amount of debt you’ve piled up — even where you work and live. Plus, if you’ve ever been sued, arrested or filed for bankruptcy.
They compile all of this information and generate a credit score — basically a grade — of how financially reliable you are. The higher the score, the better. Each credit bureau develops their own score, but the information is also compiled and interpreted by Fair Isaac Corp., which generates its own “FICO” score. Generally, that’s the one most creditors use.
Why should I care about my credit score?
Your credit score plays a big part in your life, even if you’ve sworn off debt. But you haven’t have you? Well, if you are looking to rent an apartment, buy a house, purchase insurance or get a new car, your credit score is in play.
Want a credit card? Score! Want to hook up to cable or satellite TV? Score! Even if you’re trying to get a job, some potential employers will have you sign a disclosure so that they can access your score. For better or worse, it’s a number that is being stamped on your life as a grade for your character and dependability.
What’s a good credit score? What’s a bad score?
Think of 7 as your lucky number. Generally, a credit score of 700 or more is considered favorable. Of course, things are never that simple. Each credit agency has its own score range with minimal variations — and then there’s an alternative scoring system called VantageScore. Developed by the Big Three agencies, it ranges from 150 to 990, just to confuse things a bit.
But the scores most reported, including the FICO score, commonly range from a low of 300 to a high of 850. Experian says that the average American has a credit score of 675, so at 700+ you’d rank above average.
Here’s how the curve is graded:
- Anything under 640 is considered a poor score — You’re likely to be considered a high-risk borrower and that means your credit card interest rates will be much higher than average and you won’t qualify for a typical loan.
- 641-680 is graded ‘fair’ — You may qualify for that loan or credit card, but your rate will be a higher than borrowers with a better credit rating.
- A credit score of 681-720 is good — You’re in the pocket. With a score in this range you’ll get plenty of credit card offers, qualify for loans with good rates and pay lower insurance premiums.
- 720 to 850 means you’re buying lunch — At this level you get the best rates on credit cards, car loans and home mortgages. 720 is the threshold to what is deemed a “perfect” score, so you don’t have to try to attain a lofty perch at 850, because no one will be handing out awards or additional perks.
What affects my credit score?
The “how and why” of your credit score doesn’t have to be a mystery. There are tangible reasons why your score changes, and specific steps that can be taken to improve your credit history and ultimately increase your credit score. Let’s look at what most impacts your credit score, according to the source itself: FICO.
- Credit history (35%) – Timely repayment of borrowed money is the most important factor in your credit report, impacting 35% of your FICO score. This includes credit cards, retail accounts (like department store credit cards), loans and finance company accounts. Late payments can impact your score for up to seven years. And your credit history also includes bankruptcies, foreclosures, lawsuits and other public record and collection items. Legal action can impact your score for 7-10 years, though the impact slowly lessens with time.
- Amounts owed (30%) — Carrying a large debt load can lower your score, even if you make payments on time. Having used a large portion of your available credit can account for 30% of your credit score. FICO also considers remaining balances due, as well as the number and types of credit accounts you have.
- Length of credit history (15%) — The longer you’ve managed credit, the better. Having a brief credit history can lower your score.
- Types of credit (10%) — This is not a key factor, accounting for only 10% of your FICO score, but still a consideration. Having a good mix of credit: retail accounts, credit cards, installment loans and a mortgage, are all considered. For example, not having a credit card can actually lower your score.
- New credit (10%) — FICO believes that having several new credit accounts pop up in your report within a short period of time means you represent a greater lending risk, especially if you have a short credit history.
Tips to improving your credit score
So there are a lot of moving parts that make up your credit score. I know my head is hurting a little bit just writing about it. But here’s the good part. There are some fairly simple things you can do to improve your score:
- Start early — You like this one, don’t you? It’s true, you have to begin building your credit history early, so get a credit card if you don’t have one.
- Use no more than half of your available credit –- For example, if your Visa card has a $1000 credit limit, train yourself to use just half — or less — of that available credit. By thinking of your card as maxing out at $500 instead of $1000, and disciplining yourself to spend less than the credit limit, you will lower your “balance-to-limit” ratio, which can help raise your score. This only applies to revolving consumer accounts, not to your mortgage or installment loans.
- Use payment reminders –- Since making timely payments is the greatest factor in your credit score, you may want to make the process as painless as possible. Using payment reminders or automatic debit payments can help, but remember to set the payments for an amount greater than simply the minimum required.
- Pay off accounts but don’t close them — Once you pay off a credit card that you think would be best retired for good, don’t use it again — but don’t close the account, either. Keeping it open will maintain your available credit, and by not using that credit you’ll enhance your balance-to-limit ratio.
Know your credit score
You can’t fix what you don’t know, so know your number. First, order a free credit report. Each of the Big Three bureaus is mandated by law through the Fair Credit Reporting Act (FCRA) to provide you a free report once a year. You can order all three reports at once or, by rotating your requests among each one, you can receive a fresh credit report every four months. Yessir, now that’s good, clean fun!
There is only one official site for obtaining your free report and it is annualcreditreport.com. Watch out for bogus sites claiming to be the official “free credit report” website. You can also call (877) 322-8228 to order a free report.
Once you have your credit report in hand, you’ll want to check it for accuracy. Make sure your address and other personal information is correct and then review each credit account, looking for inaccurate amounts owed and verify that each credit account is actually yours.
If you find errors, you’ll need to contact the individual credit agency issuing the report to begin the correction process. You can find help on correcting credit report errors, including a sample dispute letter, at the Federal Trade Commission website.
When you’re diving into the pages of your credit report, you may start scrambling to find your credit score. Let’s hope you stuck with me this far. You see, while your credit report is free, your credit score is not. You have to buy your FICO score for about $20 from myfico.com.
Some credit cards also provide your FICO score to you free, as a cardholder benefit.
And there are services that offer to estimate your credit score — some saying they will provide these “educational scores” for free — but it’s probably best to stick with the real thing.
The end game
Now that you know just how critical your credit score is to your financial life, you’re empowered to nurture your number. The keys are to know your score — what it means and how to improve it. In this case, Big Data, along with a big number, can help you live large.