Credit Score

Calculate Credit Score: How Do They Do It?

Just about everyone who has been an adult for any amount of time knows the importance of establishing and maintaining a good credit score. It is your credit score, as determined by the three credit reporting bureaus, that determines your creditworthiness. Lenders of all sorts, and even landlords and insurance agents, are likely to pull your credit history practically before they shake your hand and say, “Nice to meet you.”

Do you know your credit score? Do you wonder how TransUnion, Experian, and Equifax calculate credit scores?

Credit scores are calculated by looking at your income, your expenses, the amount of credit you already have, and how well you have paid your bills in the past. By looking at all of these different items, the credit agencies apply a mathematical formula, calculate your credit score, and report their findings and determinations to those who inquire about your creditworthiness.

Information that may have a negative impact when your credit score is calculated incude:
• A large amount of outstanding debt.
• A low income-to-debt ratio.
• A bankruptcy.
• Late payments
• No credit history
• A limited credit history
• Unpaid utility bills
• A lot of open credit accounts, even if they have low or no balances
• A lot of accounts being opened at the same time.
• Closing accounts that still have a balance.
• Closing a lot of accounts at the same time.

If you are attempting to calculate your own credit score, you may find it difficult to do so, as there are quite a number of variables involved, but if you follow the simple strategies below, when your credit score is calculated, you are likely to have a pretty good score:
• Apply for only one type of credit at a time and wait for a few months before applying again.
• Pay your utility bills (electricity, cable, water, phone) on time each month.
• Live within your means.
• Make all credit card or other credit payments on time.
• Pay more than the minimum due on your credit cards.
• Use credit cards to buy necessities such as groceries, but only if you have the willpower to put the same amount of money away and pay for them in their entirety when the bill comes in.
• Maintain a savings account for emergencies.
• Save up for the purchase of expensive items rather than charging them all the time.
• Check your credit history periodically to make sure it is accurate.
• Correct errors on your report promptly.

The best advice on how to improve credit score is to play by the rules.

That means using credit responsibly. The foremost advice I can give you is to take out only the loans you need and can afford. Then, pay them on time every month.

Some credit, like a home mortgage, is absolutely necessary for the functioning of life. With renting as the only viable alternative, your home is an important asset in your portfolio. The best advice for this kind of credit is to not buy more than you can afford to pay back and then make your payments on time each month.

Other credit, called revolving credit, involves mostly credit card debt. The advice for credit card debt is more complicated. For instance, you don’t want to max out your cards. At the same time, you don’t want to have multiple cards. You want to appear like you can handle the credit card debt that you have.

High outstanding debt on credit cards can lower your credit score. So, you should keep balances low. At the same time, you don’t want to have a lot of unused credit because that too makes you a risk. If you have $1000 in debt but $20,000 in available credit, the credit reporting companies recognize that you could go on a spree and suddenly end up over your head in debt.

Another trick some suggest for how to improve credit score is to move debt balances from card to card always chasing low teaser rates. The credit reporting companies have gotten wise to this trick. FICO says that paying off debt rather than moving it around is the effective way to improve your credit score.

You shouldn’t close credit cards as a short term strategy for how to improve credit score. While over the long run, having fewer cards can help the score, if you are looking for a short term boost, this can actually hurt you.

Similarly, you shouldn’t open a bunch of cards to make it look like your credit utilization ratio is smaller. You also shouldn’t open a bunch of accounts when your credit is new, which happens to a lot of young people who are bombarded with credit offers at their colleges.

If you want to know how to improve credit score, you should know that it is a long term process that mostly involves managing your credit responsibly, paying your bills on time, and not taking on more debt than you can afford. There are no quick tricks. There’s just responsibility.

That’s how to improve credit score.

FICA Score: A Number That Is Hard To Get

You should demand to get your FICA score as soon as possible. Because this key credit number can determine how much you pay on your house, what your insurance rates are, and even whether you get a job, it is important to know what it is. But, even though you can get free credit reports, in order to access your FICA score, you have to pay a fee.

That’s just wrong.

When Congress authorized the bill to require that the credit bureaus give one free credit report per year, they overlooked a very important number – the FICA score.

The individual credit reporting agencies – Experian, Equifax, and Trans Union, all use the raw data from the Fair Isaac company to determine a score. But, Fair Isaac puts out the authoritative FICA score, which is what many businesses use to evaluate your credit worthiness. For instance:

· Lenders determine whether you get credit and how much you will pay in interest.
· Landlords determine whether you qualify to live in their homes or apartments.
· Utility companies use the FICA score to decide whether you have to pay a deposit for basic services like water and electricity.
· Cell phone companies may not give you a phone or service if your score is too low.
· Auto and home insurance companies use the score to determine insurance rates.

Most people don’t realize that they can’t access their credit reports for free. In fact, the Consumer Federation of American found that 75 percent of Americans thought they could get the number if they wanted to. That is part of the problem. Because they can get their credit report, they think they can also get their credit score.

Some companies charge a high fee – up to $50 a year – and then offer to “waive” it if you sign up for expensive monitoring services or other products you don’t need.

And, even when you purchase your number, you can’t be assured that it is accurate. In many cases there is a difference of 30 to 100 points between the actual score and the FICA score the consumer buys.

If you want to buy your score, the only place to be assured you’re getting the real thing is at MyFico.

You should also know that your actual credit score is always in flux. If you put an extra $200 on your credit card, your score could budge 3 points. If you close a department store account, your credit score could move. And, if you pay off a credit card but don’t close it, your credit score will also be adjusted.

But you’ll never know exactly how things are moving. In fact, the only business required to show you your FICA score is your mortgage company. And, they don’t even have to show you the score that they used to determine the mortgage, they can show you a different one which “proves” you need to pay a higher interest rate.

The credit bureaus’ product is the consumer’s personal data. Consumers have a right to this information. Congress needs to act to extend the right to get a free credit report each year to include the right to access your FICA score.