HM Credit Consulting - Understanding Credit Scores

Your credit score (or FICO score) is a number ranging from 300 to 850, which is used by creditors to determine the risk level in extending you credit. Lenders interpret a higher score as an indication that a person will make their payments on time. Therefore, lenders are more likely to extend credit with favorable interest rates and terms to those with high credit scores. Credit scores can impact your life in a multitude of ways. They can affect your ability to qualify for credit cards or loans, rent an apartment, or get hired for a new job.

Click to view comparison of credit scores.

What is considered a good credit score?

The highest FICO score you can achieve is 850. Most experts agree that optimal scores fall between 720 and 850, with scores over 750 considered excellent credit, and scores from ranging 660 to 749 considered fair to good credit. With a credit score below 660 you may have trouble getting prime interest rates and terms on money borrowed, and if below 620, it may be very difficult to get credit at all.

How are Credit Scores Calculated?

Scores are calculated from five major sets of information found in your credit report. By understanding the FICO scoring model, you can learn how to maintain a good credit score or raise a low credit score.

These are the most important factors used to calculate your credit score:

35% percent of your credit score originates from your payment history. When late payments are reported to the credit bureaus they lower your score dramatically.
30% of your score is calculated by comparing your total debt, such as credit card balances, to available credit (credit limits).
15% of your credit score is based on the length of your credit history.
10% is derived from the types of credit you use. Some credit accounts are weighted more heavily than others.
10% of your FICO score is determined by how much credit you have used recently.

Some Tips For Improving Your Score:

Making payments on time will raise your credit score.
Do not max out your credit cards. Attempt to keep your balances below 30% of your credit limit. This will present a healthy debt-to-credit ratio to lenders.
Do not apply for new credit on a whim. Each time you submit an application to a lender or credit card company they pull a copy of your credit report. This is called an inquiry. Too many inquiries in a short period of time can lower your credit score.

If you find yourself overwhelmed by debt, seek help from a credit professional immediately. Court judgments, tax liens, and bankruptcies will destroy your credit rating. You can avoid having these damaging items appear on your report by negotiating a settlement with your creditors.

Where Do I Get My Credit Report and Score?

U.S. residents may request one free copy of their report each year from each credit reporting agency. You can do this through the Internet by visiting:

http://www.annualcreditreport.com/

These credit reports are free but will not include a credit score. You can buy your credit report with credit score at: http://www.experian.com, http://www.transunion.com, or http://www.equifax.com

It is important to get a credit report and score from each bureau to get an accurate picture of your credit. Equifax, Experian, and TransUnion all use scoring models based on the FICO system but your score may differ slightly at each credit reporting bureau.