A good credit score is vital for loan approval and can help you borrow at lower interest rates.  Depending on how much you borrow a good FICO credit score could be worth hundreds or thousands of dollars.

What is a good credit score?

A good credit score falls in a range of 675 – 850, the strength of the score depends on which credit scoring system you’re using.

Good Credit Score Range

Before you get a handle on what is a good or high credit score, you first need a basic understanding of how the scoring goes. FICO, which is the primary credit score that lenders around the country use, starts at 300 and goes up to 850. A good FICO score starts at 675 and goes to 699. A very good credit score picks up at 700 and goes to 799. An excellent credit score ranges from 800 to 850.

Prior to the downturn in the economy and stricter lending guidelines, a good credit score could get you far. A good credit score could get you an auto loan, mortgage or credit card, with favorable terms and a fair interest rate. Since the downturn in the economy and the stricter lending guidelines, your credit score has to be higher to get approval from some lenders.

Journey to a Good Credit Score

The calculation of your credit score has of five components: payment history, balances, credit history, types of credit and new credit. Each component has a higher weight than the one that follows it, so these are in order of importance. If you want to boost your credit score into the good, very good or excellent category, then these five components play a vital role.

1. Payment history (35%)

The primary way to boost your credit score is always make your payments on time.

2. Balances (30%)

The second way to boost your credit score is to maintain manageable balances on your credit accounts. If all of your credit cards are at the limit, then pay down or pay off the balances. Maintaining a manageable debt level is another boost to your score.

3. Credit history (15%)

Time is on your side when attaining a higher credit score. When you have long and positive relationships with your creditors, this boosts your credit score. Avoid opening and closing credit accounts and loans. Instead, maintain your account and credit relationships.

4. Types of credit (10%)

You should also vary the types of credit accounts you have. Having a mixture of credit cards, auto loans, student loans, mortgages and store credit accounts can help. You can attain a good credit score more easily if you have a mix of credit account types.

5. New credit (10%)

Finally, establish new credit accounts once in awhile. If you do not have a combination of different types of accounts, this is an opportunity to open a new account using a new type of credit.

What’s a Good Credit Score Worth?

Your credit score may actually be used as a criteria for more than approval for a car loan or home loan these days. In some cases employers, rental agencies, and insurance companies may check your credit score before hiring you, renting to you, or writing an insurance policy for you.

The impact of these uses are hard translate into dollars since your credit score isn’t used in all cases and we don’t know how exactly its being used.  Just be aware that the value of a good credit score goes beyond approval and interest rates on loans.

It’s not simple to say for sure how your credit score will impact your loan application since there are different credit scoring systems and lenders use other criteria in addition to your credit.  One thing’s for certain, the more money you’re borrowing, the more you’ll pay in interest. So your credit score often has the biggest bottom line impact on a home loan.

You can get an idea of how much a good credit score can save you, or a bad credit score can cost you, from the credit score calculator on the MyFICO site.  Below is a snapshot of the estimated monthly payments for each credit score range on a 30 year fixed mortage of $300K.

As you can see the savings from one credit score tier to the next is significant. If you compare the best credit score tier to the worst credit scores you’re looking at almost $300 a month difference.

Bad Credit?
If you’re in the bottom tier of the table you’ll obviously have to pay a higher interest rate, which means thousands of dollars over the life of your loan. Not only that, lending requirements have tightened enough that you may not be able to get a loan at all. So how can you build up your credit history to improve your credit score if no one will give you a loan?

One of the best ways to rebuild your credit is to use a secured loan or a secured credit card.  Since the loan is backed by an asset, the lender is willing to take the risk of loaning you the money.  If you make sure the lender reports to the credit agencies (Equifax, Experian, or TransUnion) and that you send in all your payments on time this approach should help improve your credit.

How to Check Your Credit Score
If you’re not sure where your credit score stands, there are several ways that you can check your credit score.  In fact, you can get a free credit score from multiple sources online.

The FTC established a site called Annual Credit Report where you can get a free credit report several times a year.  Unfortunately it doesn’t include your credit score but there are places you can check it without paying.  Some of the sites, like Credit Karma, are free because they use a variation of the FICO score.  It may not match your FICO score exactly but can give you a rough idea of where you fall.

Of course, we’ve seen that the difference between credit tiers can add up to hundreds of dollars a year in interest expenses.  If you want to know exactly what your FICO score is then you can sign up for a free trial of several different services.  As with all free trials, if you don’t cancel after the trial is over you’ll pay a fee.

• myFICO
• Experian
• TransUnion
• Equifax

The following chapter of “Debt Free for Life” goes into detail about things you can do over time to improve your credit score – and as a result, pay less interest.  He starts off by covering your credit report and how it determines your credit score.

Credit Report to Credit Score

Your credit report contains identifying information about who you are, a list of all your credit accounts,  credit inquiries made on your SSN, and any collection activity like foreclosures, liens, or bankruptcies.  The role of the credit scoring agencies (Equifax, Experian, TransUnion) is to analyze all this data and use it to determine how big of a credit risk you are.

They sift through all your data with mathmatical formulas that compare the specifics of your situation to all the information, history, and assumptions they have about borrowers. The end result is a number that’s supposed to take into account everything on your credit report and define how safe, or risky, it would be to lend you money – that number is your credit score.

So basically your credit report is all the data about you and your credit score is a summary of that information that lenders use to decide whether to lend to you and at what terms.  Since all the data on your credit report helps make up your credit score, Bach’s book points out how an error on your credit report can potentially hurt your credit score.

Bad Credit Report Data

Bach cites studies that have shown a surprsingly high number of people who have errors on their report, so he suggests the first thing you should do when trying to improve your credit score is check your credit report for any errors.

The Fair Credit Reporting Act (FCRA) can help you out in two different ways.  One thing it does it require the credit bureaus to give you one free copy of your credit report each year, which you can find at annualcreditreport.com.  

Example Credit Letter

Another thing the FCRA does is require that inaccurate information on your report be corrected if you can prove that it’s wrong.

After you send in a request to a credit bureau to correct your information they have 30 days to respond back.  Another important point that Bach mentions is that you have to fix any errors separately with each different credit bureau.

His book gives you a form you can use to ask a bureau to fix your credit report and also provides the addresses where you can send your request for Equifax, Experian, and TransUnion.

Why a Good Credit Score Matters

As I mentioned the intent behind your credit score is supposed to be a standard gauge to help lenders decide whether to lend you money, how much, and at what interest rate.

What Bach brings up is that your credit score is now being used for more than just lending decisions.  I don’t have any exeperience with this but there are cases where credit scores are used when making hiring decisions and evaluating you for insurance coverage.

One example he gives in his book is that in the military, soldiers with poor credit scores could be passed up for promotion because the bad score might represent a security risk.  I don’t have any data on how widely credit scores are being used for things other than lending decisions but if it becomes more widespread then your credit score could influence more than just you borrowing money.

Should You Care About Your Credit Score?

I’ve had people complain on this site that the whole credit scoring system is out of control.  For example, they think it’s ridiculous that college students or young professionals should borrow money just to build a credit history.  The obvious fear is that you create debt, or a habit of borrowing, just so you can prove to the system you’re not a risky borrower.

I agree it does seem silly to borrow money when you don’t need to, promoting borrowing, instead of saving.  However, I don’t think it’s something that you can ignore simply because you don’t agree with the system. Everyone who wants to borrow money will be compared to millions of other people by the credit scoring models.  Good or bad, right or wrong, the credit scoring system is how lending decisions are made in the US.

The longer you don’t acknowledge it’s importance and avoid taking steps to build a credit history, the more difficult it might be to borrow money when you need it someday.  It takes time to build up a credit history so it’s better to start when you don’t actually need the money and do it gradually over the years, rather than wait until you really need the money and time isn’t on your side.

Bad Credit Scores

Halfway through the chapter on your credit score, Bach highlights the fact that last year FICO announced about 25% of US adults had credit scores below 600.

This is a big deal because a score below 600 makes it difficult for you to get approved for a credit card, car loan, or home loan.  I imagine many of the people that fell below 600 had some sort of financial complication caused by the “Great Recession” of the last few years.

The reasons he highlights the big drop in credit scores in the book is to demonstrate how your credit score can change over time.  The median credit score in the US is estimated at 720 and it could be that some of the people who dipped below 600 at one point had a score of 720 or better.

The scary thing about your credit score is that the time you most desparately need to borrow money could be when your credit score is at it’s lowest. So if you have a good credit score but then lose your job and your house and can’t pay your bills, your lenders will inform the credit bureaus and your credit score will fall.

I think the important lesson here is to think twice before depending on something like a home equity line of credit for your emergency fund.  If your financial life has a melt-down it can take that emergency fund with it, as well as your credit score.  At that point, you’ll be really glad if you saved up an emergency fund to help you get back on your feet.

Good Credit Scores

Now that we’ve covered why you have to watch out for a bad credit score, let’s look at what you need in order to have a good credit score.  FICO lists the different credit score factors on it’s website, Bach discusses each of those compenents in his book and gives example of what to consider for each.

Each factor has a different weight and the ones that make the most sense are the ones that make up the biggest portion of your score.  The top three are your payment history (35%), amounts you owe (30%), and your length of credit history (15%).  These make sense, lenders want to know what you’ve done with your loans in the past, how much you owe right now, and how much experience you’ve had with borrowing and repaying loans.

The other two factors are how much new credit you’ve opened recently (10%) and the different types of credit (10%) that you currently have.  New credit applications make sense because they want to know if you’re scrambling to borrow a bunch of money. Of course, another scenario could be that you got a much higher paying job and can afford to borrow more – something your credit score won’t tell them.

In terms of the different types of credit you use, apparently a bigger variety of credit can benefit this portion of the score.  Not only that, having only one type of credit can actually hurt your credit score.  I don’t really understand the logic behind this part of the criteria so I can’t explain why it works that way.

Negative Credit Score Factors

Bach points out some helpful research done by Liz Weston that gives insight into what actions can really hurt your FICO score. She talked FICO into giving her an estimate of how the following things impact your credit score:

• Maxing out your credit card
• Skipping a payment
• Debt settlements (ex: short sale)
• Foreclosure
• Bankruptcy

He goes into more detail about each of them and the potential number of points each could drop your credit score.

The Cost of a Bad Credit Score

Bach ends the chapter with a 12 step action plan to improve your credit but right before he digs into the action plan there’s a section on how much money your credit score can save you, or cost you, when applying for a loan.

I’ve talked before about what a good credit score is worth and how your credit score affects interest rates when applying for a home loan. The book has a table that shows an estimate of what your interest rate and monthly payment would be based on your credit score range.  According to the table a drop of 130 points in your credit score could mean an extra $300 a month in mortgage payments.

If nothing else, that kind of savings should be a good motivator to do what you can to improve your credit score.  If this article left you with any questions about your credit score, please ask them in the comments below. Next time I’ll go over Bach’s action plan for fixing your credit.

A hundred years ago, or even several decades ago, it was pretty difficult to buy something if you didn’t have the money. However, access to credit in today’s economy makes it relatively easy to spend money that you don’t have.

Should You Borrow Money?

We were faced with this decision yesterday when invited to go on a trip with some good friends of ours.  We really wanted to go but we recently visited California for my wife’s birthday so our travel funds were depleted.  Not to mention that I just mailed in the biggest check I’ve ever written in my life to paydown and recast our mortgage.

Even though we didn’t have the money on hand to pay for all the travel, we knew we’d eventually have it.  We could have paid for everything on credit and paid it off later but we make it a habit to pay our credit card bill in full each month so that wasn’t something we were willing to do.  Still, we really wanted to go on the trip so having to tell them that we didn’t have the money was tough.

Of course everyone’s decision making process will be different based on your financial situation but there is one thing that’s true for everyone trying to decide if they should borrow money or not, you should make the decision with care or you might end up regretting it.

Steps to Spending Money You Don’t Have

Here are some high level steps to take if you find yourself looking to spend money you don’t have.

1) Estimate the cost of what you need/want.
2) Figure out how much you can afford to spend.
3) Determine how much money you’re short.

Once you know how much more cash you need you can consider ways to get that amount without borrowing it.
 
4) Look for places you can “find money”.
5) Estimate how quickly you can get the money.

Now you have a feel for what you need and how long it would take to come up with that money.  If you cant wait that long or can’t figure out ways to “find money” (like earning extra money or re-prioritizing areas of your budget) one potential step is borrowing money. 

How you choose to borrow the money can have a big impact on the premium you’ll pay for spending money you don’t have.

6) Determine who you’ll borrow from.
7) Calculate the cost of borrowing the money.

You can get quick and easy access to credit if you have a credit card in your wallet, however, you’ll pay pretty high interest rates until you pay the money back.  One option is to apply for a loan with your local bank or through an online bank where rates can sometimes be cheaper. 

You’ll have to weigh your different options for borrowing the money.  For example, you’ll have to apply and go through a funding process if you choose to borrow from a peer to peer lending site like Prosper or Lending Club.  In contrast, you can get a pay day loan right away but the cost will be a much higher interest rate.

Summary

At the end of these steps you’ll know approximately how much money you need, where you can borrow it from, and what it will cost you. Then you’ll have enough information to decide whether or not it’s worth it to spend money you don’t have.  I hope these tips can help you make that decision.

Lower Interest Debt

Credit Sesame actually uses your credit score and your debt profile to search for loans you could qualify for that would save you money compared to your current loan.  For example, here’s the summary page it gave me after I created my profile and it searched for loans.

I had a chat with someone from Credit Sesame and learned that the loan analysis software the site uses was actually originally built for banks, to help them qualify consumers for loans.  Then the Credit Sesame founders decided to instead open the software up to help consumers find the best loans.  Here’s how they explain it on their site:

“Our founders spent years developing the analytics banks use to make their lending decisions. Drawing on this banking industry expertise, they partnered with Berkeley and Stanford scientists to give you access to bank-level analytics — and help you choose loan options that are right for you.

In just minutes, our patent pending technology builds over 5,000 scenarios and instantly evaluates thousands of loans from all major banks against your personal credit situation.”

There are other services out there that let you search through available loans but the difference with Credit Sesame is that they screen them using your debt profile, so they only find loans that you qualify for and that are at a lower interest rate than what you’re currently paying.

Of course, the whole idea is that with lower interest and lower payments you can pay your debt off faster.

Credit Score & Debts 

In order to use your credit score and your current debt levels in it’s search, you have to create a profile of your financial situation. 

You enter your SSN so Credit Sesame can pull your Experian credit score and validate your credit data. 

Once it’s setup, the software monitors for changes in your credit score and for any new loans that may be available as a result that could save you money. When you signup for the free service you can go the simple route, like I did, and let Credit Sesame pull in all your debt information from your credit report.  You can also manually enter in the principal balance, interest rate, and loan term for your debts.

The software uses the loan information to determine your debt ratio – which they use when screening for other loans. For example, mine found our current mortgage and all our credit cards. 

It also pulls in real estate information from Eppraisal.com if you own a home – the estimated property values do seem a little high.

Free Credit Monitoring?

Most anywhere else you look online you have to pay for your credit score and pay for credit monitoring so of course I aked how Credit Sesame can offer it for free. 

Basically, Credit Sesame’s goal is to find you a loan with a lower interest rate that you qualify for that will save you money on your monthly payments.  If you apply for the loan and are approved, then Credit Sesame gets a refferal fee from the bank – which is why they can offer the credit score and software for free to consumers.

Overall, it seems like a pretty useful tool and gives you a lot of information in a snapshot view about your credit rating and debt.  Even if you don’t end up getting a new loan, it’s a good overview and a free credit score, so check it out – Credit Sesame.

myFICO & Your Score

You probably already know that your FICO score is the credit score that many lenders — and even some insurance agents and employers — use to determine what sort of financial risk you represent. Variations of the FICO score are used in a number of ways to determine approval and rates for your mortgage, car loans, and credit cards.  However, the FICO score is used by 90% of the largest banks and 100 of the top 100 U.S. credit card issuers so it’s the heavy hitter when it comes to credit scores.

myFICO Standard

At the most basic level you get your FICO score, plus receive an explanation about what it means and an idea of how lenders view you.

You can choose to see your FICO score from either TransUnion or Equifax, Experian no longer participates.  FICO standard also includes a credit report from TransUnion or Equifax, whichever FICO score you choose – your score will likely vary somewhat across credit bureaus.

The FICO Standard score and report is $19.95, but as mentioned earlier you can see your credit score and credit report at no charge if you sign up for a free trial of ScoreWatch.

myFICO ScoreWatch

ScoreWatch allows you to get two FICO scores and two credit reports from Equifax each year, and it keeps tabs on changes to your credit score.

If you’re looking for the trending of your FICO score rather than just a snapshot then Scorewatch can be useful.  For example, if you’re trying to improve your credit score and want to see progress, ScoreWatch gives you a graph of your score over time as well as regular updates:

• Monitors Equifax credit report daily & FICO score weekly
• Target credit score notifications
• Notifications when you qualify for a better interest rate
• FICO score drop alerts due to changes in your credit report

Check out ScoreWatch

FICO Quarterly Monitoring

If you’re not actively tracking your credit score but want to check in on it a few times a year, FICO Quarterly monitoring can help you keep tabs on your score.  

As you may know you’re able to get a free credit report every year from each credit bureau from annualcreditreport.com.  This service uses TransUnion and makes your credit report and credit score available every quarter.  The one extra credit report you get from the myFICO service is nice but you might not really feel like you need it.  The main benefit of this service is that you get your credit score in addition to your credit report.

So every three months you receive a score and report, and an explanation of the positive and negative items affecting your score. You can identify problem accounts, as well as look for ways to improve your credit situation. The Quarterly Monitoring service will also alert you to changes in your credit score.

In the event that the change was due to identity theft, myFICO’s Quarterly Monitoring also provides identity theft insurance for up to $25,000 and a hotline to help you file id theft reports and complaints.

Suze Orman’s FICO Kit

While ScoreWatch and Quarterly Monitoring are setup to keep track of your credit score over time, the Suze Orman FICO kit is designed to walk you through the steps to help improve your credit.  Created along with personal finance author Suze Orman, there’s more coaching and what-if analysis in the FICO kit.

Suze Orman’s FICO Kit gives you three credit reports and scores a year. The kit also includes the FICO Kit Action Planner that helps you take the information in your credit report and plan out steps to improve your score.

You can tailor the tool to your personal situation with their tools like the debt eliminator, bill pay reminders, and online coaching to help you get a car loan or home loan are included. You can also use the FICO Simulator, which allows you to estimate the effect certain changes would have your score.

You can use this myFICO promo code to get a discount on the FICO kit – SUZEFKP

If you do pay off your balance each month then there really isn’t anything in the Chase Blueprint for you.  On the other hand, if you are carrying a balance on your Chase card you should checkout their Blueprint. Just be aware that simply enrolling in the free program won’t get you out of debt.  You have to follow the steps and stop adding new debt to make a dent in what you owe.

Chase Blueprint Details
The idea behind Chase Blueprint is to help you create a plan for better managing your money — and your debt. Of course everyone’s situation is different so the program has four different features to help you plan and track your debt payments and spending.

• Full Pay
• Split
• Finish It
• Track It

Here are some of the details on each of the Chase Blueprint features:

Full Pay – No interest on recurrent monthly expenses: You can divide your spending into categories. If you have recurring expenses, such as bills that you pay, groceries or gas, you can designate those specific areas as recurring. Then, each month, Chase will tote up those expenses separately from your total spending. As long as you make your Blueprint payment in full (Chase will tell you what that is), you won’t pay interest on those charges. You pay interest only on carried balances and one-time purchases that are not included in your recurring categories.

Split – Target specific purchases: Chase Blueprint also helps you target specific purchases for pay off. If you decide to buy a new TV, and you want to set up a specific plan to have that item paid off in three months, Chase will help you figure out the payment you need to make, and remind you to make it.

Finish It – Pay down a balance: It is also possible, with Blueprint, to create a plan for paying off your balance in a specific time period. You can work out a payment plan that can help you pay off your credit card balance within a year. Chase will figure what payment needs to be made, while at the same time helping you manage your other Blueprint payments for recurring expenses or targeted purchases.

Track It – Budget tracking: You can also use Chase Blueprint to track your budget. Different categories are available so that you can see exactly what you have been spending your money on. This can help you easily see where you might need to make adjustments to your habits, and Chase will even help you stay on track with your spending plan.

Bottom line

Although it’s best not to carry a balance, if you do have credit card debt Chase Blueprint can be a helpful management tool. Like any tool, it’s only effective if you actually use it so you have to stick with your plan.

Those who would benefit most from Chase Blueprint are those who want to pay off some of their recurring expenses each month, but who are not to the point where they can pay off the entire balance at once. The Chase Blueprint program is free but only available on certain Chase credit cards: 

• Chase Sapphire
• Chase Freedom
• Slate from Chase
• Chase Ink

Some banks will let you borrow against the accumulated value of your home if you have enough equity built up.  These types of loans are known as second mortgages and there are two main types: a home equity loan and a home equity line of credit.

Home Equity Loan

In general, a second mortgage of this type is a loan that comes in a single lump sum. You have to remember that it is an entirely different loan from your original mortgage. You will need to have a credit check and fill out a mortgage application. You’ll also need to keep your eye on interest rates and lock in at the best mortgage rate you can find.

A second mortgage in this form is sometimes used for debt consolidation. People who have high interest debt may borrow at the lower rates available via home equity loans and use the money to consolidate all their debts at a lower interest rate.  One of the financial benefits of this approach is that the interest you pay on a home equity loan is tax deductible, unlike interest you might pay on a credit card.

Another popular use for home equity loans used to be borrowing money for big home improvement projects.  Of course the problem people ran into was that when the value of their home decreased, they still had to pay back the loan even though their house was no longer worth the amount they had borrowed against. Now days credit in general is harder to come by and banks are less likely approve loans of this type.

You do have to be careful when taking out a home equity loan since you are adding to your debt levels. If you default on a home equity loan your home can be foreclosed on so it is important to carefully think about whether you want to take that risk with your home.

Home Equity Line of Credit

Unlike the home equity loan, which is usually paid in one lump sum, a home equity line of credit is a type of revolving credit that allows you access to an approved amount of the equity in your home for a fixed period of time.  Typically you’re given special checks or a credit card that you can use to tap into your equity as needed.

This is still another loan, so you will have to go through the credit and application process and the bank will determine how much equity they’ll let you borrow against.  Once you are approved for a line of credit, you can get money as you need it for the life of the loan, known as the “draw period”.

Most home equity lines of credit come with variable rates, rather than fixed rates, so your payment can change as you pay off the loan. Like a home equity loan, the interest you pay on a line of credit may provide you with a tax deduction.

It is important to be careful with home equity lines of credit, since you have access to the cash it can be tempting to take more money than you need. 

Bottom line: If you’ve built up equity in your home the home equity loan and line of credit make it possible for you to access that money without selling your house.  While the interest you pay is tax deductible you are putting your home at risk by taking out a second mortgage so be sure you have a plan to pay it back before taking out the loan.

Don’t Pay Your Bills Late

Your payment history is the most heavily weighted factor that goes into your credit score so make sure you’re at least making your minimum payments.  If those are more than you can afford sometimes the companies you owe money to are willing to put you on an extended payment plan.

Maintain Low Credit Card Balances

The next most important factor making up your credit score is the percentage of your available credit that you borrow.  If you’re constantly using up over 30% or 40% of your credit available you will be deemed a higher risk.

Build Credit History

The average age of your credit accounts is the next biggest component of your credit score.  If you add a bunch of new credit and cancel old cards this will drag down the average age of your credit accounts and your credit score along with it.

Use a Mix of Debt

This matters because companies look at the different types of debt that you have and weigh some more heavily than others.  For example, your credit card debt carries more weight than your mortgage or car loan.

Reduce New Credit Lines

Credit reporting agencies Experian, Equifax, and TransUnion monitor for attempts to open new lines of credit.  Each time a lender does a hard pull on your credit report that credit inquiry is noted and the more you have the worse an effect it can have on your credit score.

1) Start off by getting a copy of your free credit report and looking for any errors.

2) If you find anything, check to see if the mistake shows up on your reports from other credit bureaus. You will need to file separate disputes with each credit bureau that shows the mistake.

3) Go to each bureau’s Web site for instructions on how to file a dispute, what happens after the bureau receives a dispute, and what actions to take if you think your identity has been stolen:

• Equifax
• Experian
• TransUnion

4) Clearly identify each error in the report and explain why you think the information is wrong.
Keep detailed records of what corrections you requested, along with copies of supporting documentation.

5) Don’t send any original documents if you submit your dispute in the mail; make photocopies and send those instead. 

6) Keep a record of when and how you contacted each credit bureau, noting any follow-up phone calls and the names of the people with whom you spoke. In case the correction isn’t resolved smoothly, these records and notes will come in handy.

7) If you find any evidence of identity theft, such as an open account that you know you never opened, make sure to follow the credit bureau’s instructions for reporting identity theft.

The credit bureau should respond to your dispute in writing within four to six weeks. If the bureau agrees with you, the bureau will correct the mistake. If there is a dispute over the corrections you’ve requested, or if you think that someone has stolen your identity and is using your credit, be prepared for a long period of back-and-forth communication with the credit bureau and your creditors.

The burden of proof lies with the bureau, if it can’t prove that the information in question is correct then it has to delete it. However the process of resolving a dispute or unraveling a case of identity theft can be complex and lengthy. Good luck!

Calculating FICO Scores

Now that you know what a FICO score is you’re probably wondering how it’s calculated. The FICO score breakdown looks like this:

Payment history (35%): Making your payments and making your payments on time.

Balances (30%): The more manageable levels your outstanding balances are, the better off your credit score is.

Credit History (15%): The length of your credit relationships are important. The longer your relationships with credit card companies, mortgage lenders, auto loan providers and more, the better.

Credit Types (10%): Your credit score is also determined by the various types of credit you have. High credit scores come from having various types of credit such as mortgages, credit cards, student loans, car loans and more. It’s about your ability to manage different types of credit so if you only have a credit card then it doesn’t speak to your ability to manage various types of debt.

New Credit (10%): The final portion of the FICO score credit calculation is establishing new credit. You can tackle two portions of your credit score at once by applying for new credit that is a type of credit you don’t have.

Good FICO Scores vs. Bad Scores

With the current credit crunch in full swing, what used to be considered a good credit score (in the 700s) may now be considered low by lenders since they’re more risk averse.

• Good credit scores are those 750 and higher
• Mediocre credit scores range from 650-749
• Scores from 300-649 are considered bad credit

How can you find out your FICO score?  Experian, which is one of three three major credit agencies teamed up with FICO, so you can request your score at the Experian site or MyFICO. Be sure you check into the ways you can get a free credit report.

Improving Your FICO Score

If your FICO score is low, concentrate on improving your credit score by concentrating on the five areas that factor into the score. First, make sure you always make your payments and make them on time. Second, pay down or pay off debt so that it’s at a reasonable amount for your income level.

Do not close old accounts because you don’t use them anymore; keeping them open can help boost your credit. Also be sure to establish new credit once in awhile to keep your credit file fresh and mix it up a little by making sure that the credit you have is diversified.

Now that you know what your FICO score is and how important it is for obtaining credit approval be sure to take the necessary steps to maintain or improve your credit score. Especially in a credit crunch, your FICO score may make a difference between getting approved for a loan or getting denied.