Do you understand how the credit scoring system works? A recent survey shows that people who get their credit score know much more about how the system works than do those who do not.
According to a survey released in June by the Consumer Federation of America (CFA) and VantageScore Solutions, the percentage of consumers who have obtained at least one credit score over the past four years has risen to 57 percent in 2018, up from 49 percent four years ago.
Even so, there remain gaps in knowledge. For example:
Significant minorities incorrectly think that age (41 percent) and marital status (38 percent) are used in the calculation.
And majorities wrongly believe that tax liens (64 percent), medical collection accounts less than six months old (62 percent) and civil judgments (63 percent) are used to compute scores.
To help you from falling into the credit score knowledge-gap arena, here’s what you need to know about how credit is scored and how to raise it.
- Get a recent copy of your credit report: You can go to several free sites and download a free copy from each of the three main credit bureaus.
Next, review your reports and identify mistakes and/or information you feel is incorrect. If you feel that something is incorrect, you are allowed by law to dispute the item(s) with the credit bureaus. All you have to do is submit a dispute letter, along with proof or documentation that the information is inaccurate. The bureau will then ask your creditor or lender to verify the information you provided.
If the information cannot be verified, then the item must be removed from your report. Unfortunately, you will have to make your dispute to each bureau separately if it appears on all three. Please note that your credit score is calculated from your credit report.
- Learn the factors that affect your credit: There are many factors that affect your credit, and each one represents a different percent of your score. These include:
- Payment history counts for 35 percent of FICO, a widely used score: To lenders, your history of payments indicates whether you’ll make payments on time in the future. A FICO score is a three-digit number calculated from the credit information on your credit report at a consumer reporting agency at a particular point in time. It summarizes information in your credit report into a single number that lenders can use to assess your credit risk quickly, consistently, objectively and fairly. Lenders use your FICO scores to estimate your credit risk
- Amounts owed count for 30 percent of your FICO score. Plenty of available credit relative to the amount owed indicates to lenders that you manage credit responsibly.
- Length of credit history counts for 15 percent of your FICO score. The age of your oldest account indicates to lenders how much experience you have handling credit.
- Credit mix in use counts for 10 percent. Lenders will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
- New credit counts for 10 percent of your FICO score. To lenders, opening too many new accounts in a short window of time could point to problems.
Note that your credit score can vary from provider to provider. According to credit.com these are the credit score ranges used by major credit scoring models:
FICO score range: 300-850.
Experian PLUS score: 330-830.
TransUnion new account score 2.0: 300-850.
Equifax credit score: 280–850.
- You need to develop a game plan: It takes some time, but building or rebuilding credit scores can be done. It just takes a plan and sticking to that plan.
What should you include in your plan?
- Pay bills on time: This accounts for the biggest percentage – 35 percent actually – of your credit score. So, don’t fall behind, pay your bills on time and check into automatic payment options so you don’t miss a payment.
- Keep credit card balances below the limit – well below: Try to use no more than 40 percent of your available credit line. If you have credit cards and installment loans and you make timely payments, you will raise your score. If you want to pay down or pay off credit cards, pay off the one that has the smallest balance first.
- Pay off anything negative or under collections: Avoid any further collection or legal action that could damage your credit by paying off old debt, such as credit cards, collection bills and medical balances. Note, negative marks on your credit can remain on your reports for up to seven years or more.
- Keep credit inquiries to a minimum: Opening and closing credit cards can impact your credit score. When you apply for new credit, the lender makes a hard inquiry on your credit report which could potentially shave a few points off your score. If you’ve paid off a credit card, it’s not always a good idea to close it. Credit-scoring models like FICO compare your total credit card balance to your credit limit to come up with your credit utilization ratio. The more credit you use in relation to your credit limits, which can occur if you close an account, the lower your credit score will be.
- Mix it up: If you have never applied for a credit card, now is the time. Just having a car loan will not help you build a variety of credit.