Let’s be honest – so much of life is about your reputation. People want to get to know you before considering you a friend. It’s all about reputation on social media. Potential employers check your reputation via your resume, references, and possibly a background check or two. It’s no different if a bank or other lender is going to go into business with you. Oh yeah, and landlords, utility companies, insurance companies, and even licensing agencies.
As we continue our Dream Series, educating people towards achieve their dreams, we want to help you understand your credit reputation that many, many people will be looking at. We’ve already looked at setting goals and knowing where you are starting. Now we’ll look at how people and businesses will measure your credit reputation.
Very briefly, there are three major credit reporting bureaus in the United States – Equifax, Trans Union, and Experian. They all report similar information, but may report it slightly differently. Because of the amount of information in these reports, they may print out 50-, 75-, or more pages long depending on your credit depth.
That’s a lot of information and to be truthful, most lenders just don’t have the time to read through that much information 3 different times (the three different bureaus) for each client. So, instead they use your credit score.
Your credit score reduces all of that information in your credit report down to a 3-digit number. Your lender or other interested party will then use this number as a part of deciding whether or not they want to go into business with you.
There are a few different scoring models out there that use slightly different math, but the FICO score is the one that the vast majority of lenders use. So that’s the one we’ll talk about here.
What goes into that score? Excellent question….
35% of your FICO score is based on your payment history. Very simply, have you made your payments on time? Have you been late? Have you never showed up?
30% of your FICO score is based on your existing debt. For your installment debt (think mortgage, auto loans, student loans), the more of the original amount borrowed that you have paid off, the higher your score. For your revolving debt (think credit cards), the less of your available credit limit that you are using, the higher your score.
15% of your FICO score is based on the age of your lines of credit. If we take the average age of all of your lines of credit combined, the sweet spot for FICO is at least 9 years old. With the average person moving every 7 years (thereby paying off their mortgage) and paying off car loans in 5 years or less, this is one place where credit cards can really help you. You don’t even have to use them more than once or twice a year to keep them open and pay them off immediately and they probably won’t charge any interest. But they sure help your average age of credit.
10% of your FICO score is based on your credit mix. Do you have a combination of installment and revolving debt? Can you multitask with your credit and maintain them all well?
And finally the last 10% of your FICO score is based on credit inquiries. How many times has your credit report or score been pulled? The more times it gets pulled in a year, the lower your score. But wait! There’s more! Only credit inquiries for new credit applications (or hard pulls) impact your score. If you are pulling it yourself, we pull it for counseling purposes, or an employer pulls it for hiring purposes, it will not impact your credit score. Pull away and make sure you know that everything is accurate.
Now, you can certainly get a hold of your FICO score before you go to apply for a loan or bank account. Some credit cards and other places even offer it for free. But I wouldn’t get too hung up on getting that done. While your score matters, just the 3-digit number won’t tell you WHY you have that score.
To understand why you have the FICO score that you do, you need to go back to the source of the score – your full credit report. By federal law, you are entitled to at least one free copy of each of your three credit reports each year. You can go directly to each credit bureau, or you can go to www.AnnualCreditReport.com to access any or all three reports. From there, you can see why you have the score you do and even begin the process of fixing any errors that might be pulling your score down and keeping you from achieving your dreams.
Anything that can be done to repair your credit report can be done by you for free. That’s federal law too. If you aren’t sure about all of that, there are different places that will help you out. The Center for Financial Resources is certainly one of those. We don’t do the repair for you, but can pull your report and educate you. We’ll help you understand what it says, what it means, and what you can do to fix it.
To schedule a Credit Report Consultation with the Center for Financial Resources, you can call us at 605-330-2700 or go online to schedule an appointment. We do a whole lot to create our reputation on social media, so why not do a little to build a reputation that will actually help us achieve our dreams!
written by Breck Miller