Three credit bureaus, Equifax, Experian and TransUnion, each track your credit and assign you a FICO score. FICO stands for Fair Isaac
Corporation. When someone checks your credit for a home mortgage, a car loan, and in some cases when applying for a job or a home to rent, they will see three scores. For home mortgages, we use the middle score. Not the average - just the middle one.
Most sources suggest you check your credit at least yearly - to make sure there are no mistakes, identity theft issues, and the like. Taking good care of our credit is a critical part of taking good care of our finances. If you, like so many others, have had credit challenges, there is help.
The number itself can range from 300 to 850. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac. Here, however, is an approximate breakdown of how it is determined:
- Thirty five percent of the score is based on payment history.
- Thirty percent of the score is based on outstanding debt.
- Fifteen percent of the score is based on the length of time the applicant has had credit.
- Ten percent of the score is based on the number of inquiries on the applicant's report. (FICO scores only count inquiries from the past year.)
- Ten percent of the score is based on the types of credit the applicant currently has.
How should you manage your credit? Review the credit report and correct any errors. Eliminating inaccurate (and bad) information can sometimes improve the score dramatically.
- Borrowers used to be advised to close old and unused credit card accounts in order to reduce potential available credit, which could change debt ratio after being approved for a loan. Now, however, the ratio of debt to credit limit is more critical, so closing old accounts only raises that ratio, which the applicant doesn't want to do. Since creditors look at the debt-to-credit limit ratio, this can have a negative affect on a credit score because there is the same amount of debt but less available credit. So, it is not recommended to close old credit card accounts just because they are not being used.
- Because creditors also now look at the average age of accounts, it is recommended that borrowers keep those old accounts.
- Reduce balances on credit cards to 75 percent or less of available credit (25 percent is preferable).
- Pay bills on time.
- Limit inquiries on the applicant's credit report unless it's absolutely necessary. The more inquiries, the lower the score.
- Do not open new credit card accounts just to increase available credit in the hopes of raising the score.