A credit score is generated from our credit reports. These scores are now used by employers, insurance companies and loan companies to decide whether or not to issue a loan, and at what interest rate. The main 3 credit bureaus Equifax, Experian and TransUnion collect our credit history for their reports.
A credit score is generated based on 5 factors.
- Payment History (35%)
- Available Credit (30%)
- Length of Credit History (15%)
- New Credit (10%)
- Types of Credit (10%)
Payment History includes late pays (30, 60 or 90 days late), collection accounts, judgments, liens, repossessions, foreclosures and bankruptcies.
For Available Credit (or Amounts Owed), having credit card balances less than 30% our total credit limit is good. Less than 20% is better; less than 10% is best. This is true for the overall limit, as well as for each individual card.
When I began the process to increase my FICO score I focused on the two factors that account for two-thirds of the number. I set up automatic payments so that I will never have a late payment. I also determined to pay down balances on my credit cards. I called the credit card companies to ask for an increase in my credit limit. Using these and other strategies, my FICO score increased over 100 points in one year.
For someone just starting out with no credit or a thin file, establishing good payment habits is important. A first credit card may be easier to obtain from a local credit union. I would recommend two cards from different lenders. As time goes on, the average length of credit history will increase, which will improve your score. Also, if someone with a more established credit history adds you to one or two of their accounts as an authorized user, you can “piggyback” on their lengthy account history, increasing your score.
The last two factors are only worth about 10% each for the FICO score. For the new credit category, watch the number of applications for credit. It is recommended that we have none or only one or two inquiries per year. For the last category, types of credit, the easiest way to earn these points is to have revolving credit, like a credit card as well as an installment loan, like a mortgage, student, auto or personal loan. I would not suggest taking out a loan in order to earn points in this low impact category.
Free Credit Report
We can get a free copy of each one of our credit reports each year at www.annualcreditreport.com (1-877-322-8228).
Free FICO Credit Score
We can get a free copy of our FICO score from Discover Card at https://www.creditscorecard.com.
Free “FAKO” Credit Scores
Credit Karma has free “FAKO” scores from TransUnion and Equifax.
Credit.com has a “FAKO” Experian score.
Free Monitoring
We can sign up for free monitoring of our credit through Credit Karma (Equifax), Credit Sesame (TransUnion) and with Experian. After signing up for these services, you will be notified within a day or two after an application for credit that is run through these bureaus.