Kick some sand

Credit Scores – What you need to know…. First in a series so you can kick sand in your bank’s face!

If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. In general, your credit score is a number that lets lenders know how much of a credit risk you are. The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.

Not only lenders – did you know that insurers and employers rely on these scores to set rates and say “yes” or “no” to coverage or a job offer?

In general, the higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores below 660 will often give you trouble in finding credit (or a much higher rate), while scores of 740 and above will generally give you the best interest rates out there.

The credit score is based on your credit report, which contains a history of your past debts and repayments. Each credit bureau uses different methods to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO score (from Fair Isaac Corporation)

Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients - such as credit card companies and utility companies, to name just two - who provide them with information.

Once a file is begun on you (i.e. once you open a bank account or have bills to pay) then information about you is stored on the record. If you are late paying a bill, the clients pass that information to the credit bureaus. Any unpaid bills, overdue bills or other problems with credit count as “dings” on your credit report and affect your score.

Information such as what type of debt you have, how much debt you have, how regularly you pay your bills on time, and your credit accounts are all information that is used to calculate your credit score.

Your age, sex, and income do not count towards your credit score. The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

WATCH OUT: A common mistake is to close a zero balance credit card account to improve your score. If you have had the account a long time and always paid on time, closing it will lower your score.

QUESTIONS? ASK DAVID GARRETT