Basic Tenets of Credit Scoring

Maintaining a high credit score is one of the most important aspect of managing your personal finance. With a good credit score, you'll qualify for loans with lower rates. Credit scores range from 300 to 850 with national average score of about 692 (for FICO Score), and 723 as the median. Credit score of 720 is considered a good credit score. Credit score is not only used in qualifying loans, but it is also used to making hiring decisions and setting insurance premiums.

There are three credit reporting agencies (also known as credit bureau) in the United States, and they are Experian, TransUnion and Equifax. Each credit bureau reports credit score to each individuals when requested by creditors. The credit score is tied to the social security number.

Your credit score represents your financial responsibilities, and provides meaningful risk assessment to the creditors. You may obtain a free credit report annually from each of the credit bureau by contacting Annual Credit Report or calling 877-322-8228. If you find any errors or misrepresentations, you may contact the credit bureau directly and remedy problem by writing to them. The free reports do not provide numerical credit scores, but it will give you a good snapshot of your credits. If you wish to find your credit scores, you'll have to pay nominal fee to obtain them.

Here are some facts about how credit reporting agencies score your credit.

  1. Open as many credit accounts as you can. Having more credit accounts boost your credit score than having just 1 or 2 accounts. Having multiple credit accounts provide more data point for creditors to examine.
  2. Credit utilization of 10% of your total credit is most ideal for best score. For example, if you have 5 credit cards with each having $10,000 credit limit, having balance of $5,000 or $1,000 each produces best result.
  3. Closing your credit card accounts lower your credit scores. Closing a credit card that you've had for long time will damage more as creditors view older accounts better as they provide long history of payment records. Also, closing an account that has high credit limit will do more damage than the one with lower limit.

Frequently Asked Questions

Q. How many credit scores do you have, and how are they different?
A. There are many credit scores, but the most important scores are from the three credit reporting agencies. There are different types of credit scores, but FICO is the most standard followed by PLUS Score and rarely used Vantage Score. FICO ranges from 300 to 850; PLUS Score scale from 330 to 830; while Vantage Score from 501 to 900. The formula for scoring mortgage credit is different than the scoring auto loans.

Q. How does small collection account damage your credit score?
A. Fair Isaac, a creator of FICO rolled out a new rule for "small" collection accounts. A collection account that has an original balance of under $100 will be discarded by FICO scoring system.

Q. How do I improve my FICO credit score?
A. There is no quick and dirty fix of your "bad" credit. Repairing bad credit takes time, and there is no way around. There are three things you can do to keep your credit back on track. (1) Request a free copy of your credit report from Annual Credit Report. Review your credit report very carefully, and dispute any errors that may be on your credit report. (2) One of the sure way to improve your credit score is to make payments on-time. (3) Reduce your dept and lower your credit utilization to about 10% of your total credit line. (4) Never allow collection account to be on your credit report. Collection accounts stay on your report for 7 years, and they drastically lower your credit score. (5) Do not close unused credit cards, and do not create too many credit account in an attempt to boost your credit score -- it may backfire if you open too many too rapid.

Q. How do you dispute credit report?
A. If you feel there are inaccuracies in your credit report, you must contact each of the three major credit reporting agencies. Here is the contact information.
TransUnion: 2 Baldwin Place, P.O. Box 2000, Chester, PA 19022
Equifax: P.O. Box 740241, Atlanta, GA 30371-0241
Experian: - You must file your Experian dispute online.



Making a prompt payment not only improve you on your credit scores, but also saves you money on late fees and finance charges. I have recently come across a late fee of $35 and finance charge of $111 on my American Express charge card, and I wasn't able to remove them even after talking to Customer Representative and his manager. Credit card companies are more stringent about giving credits when you pay late.

Most credit companies waive 1-time late charges within 1-year period. If you have two strikes, you won't be able to remove them. If your spending is higher (5-figure charge per month), credit card companies such as American Express will NOT remove your charge even if it only happened once. I once had a dreadful $560 finance charge from American Express for 1-day late payment, and they wouldn't budge to remove the charge at all.

My recommendation is to create remainder alerts on your card account, and make payments on-time every time.

By Aladar, The Dinosaur (not verified)

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