Earlier this week we talked a little about how important a credit score is to you and your family. If you are looking to get a home or car loan, take out a new credit card, or get new car or home insurance, then your credit score matters to you. A FICO score of 720 or higher will get you access to the best interest rates in all of these areas. With a low FICO score, you may be unable to even qualify for credit. You are responsible for this score — even if you get divorced and your ex leaves you with a mountain of debt you cannot repay, your credit score does not take that into consideration. If you cosign on a loan for a family member and they walk away and leave you with the bill, then your credit score will reflect it.

Today we will discuss what makes up a credit score and how you can get a copy of your credit report. Having the knowledge of how your financial decisions impact your scores can help you either make improvements or keep your scores high. Getting a copy of your report will help you see what your creditors are reporting on you and to see if you have any reporting mistakes.

What Makes Up Your Score

Nobody but the three credit reporting agencies — Transunion, Experian, and Equifax — knows how credit scores are calculated. The formulas the agencies use are a trade secret. While you and I may think it is unfair that we don’t know how something that governs so many facets of our lives, not knowing the formula is just a reality that will never change. If you would like to start an “Occupy Experian” movement, feel free. I have to tell you ahead of time that you are better off sitting on a log in the woods — nothing will change.

But we do know how our scores are weighted.  Here is a short guide:

Payment History (35%): The agencies look at your history of paying your mortgage, credit card bills, car loans, and consumer loans on time. If you do have a late payment on any line of credit, then three factors are going to determine how much of an impact it will have on your scores. Those are: 1. Time since the late payment, 2. Number of missed payments, and 3. How bad was the late payment? The bottom line in this area is always pay your bills on time. If you have to choose one month between which bills to pay on time, always, always, always make your mortgage payment first. Mortgage lenders can overlook a late payment to your Discover Card, but convincing them that you will pay your mortgage on time is tougher when you had a late payment in the past.
How Much You Currently Owe (30%): The credit agencies compare how much you currently owe vs. the amount of credit available to you. Think of it as a percentage of credit utilization. For example, if you have a $5,000 limit on your Visa and your balance is $4,500, your credit utilization is high and your score would reflect that negatively. If you had a balance of just $500 on your credit card, then your credit utilization would be low and your score would reflect that positively. How much you owe does not impact your credit score, but how much you owe compared to the amount of credit you have is.
How Long Your Credit Lines Have Been Open (15%): The longer your lines of credit have been open, the higher your credit score will be. That means if you are looking to close a couple of credit cards, I would suggest you look at closing the ones you opened most recently and keeping the cards that you opened first. Instead of closing the card, call the issuer and tell them you are looking to close it unless they can give you a better rate or terms. You would be surprised what asking can do for you.
The Date of Your Last Credit Inquiry and the Frequency of Inquiries (10%): The more often you apply from credit, the more it looks like you have a need for credit. I would suggest that if you are looking to get a mortgage, don’t apply for any other type of credit for three to six months before you start the loan process. If you are serious about locking down your credit and stopping unsolicited offers for credit cards in the mail (I am talking to you Capital One), get a service like LifeLock. I did and it stopped those pesky card offers and offers protection against identity theft.
Types of Credit You are Using (10%): In the credit world, there are two types of credit, revolving and installment. Installment loans are credit that is extended to you that once repayed, you cannot take out additional money. Think car and home loans. Revolving credit is used for credit cards. If you pay them in full, you have credit available to spend. The credit agencies like to see a blend of both types and higher credit scores reflect the smart use of each.

Where to Get Your Credit Report

As a consumer you have the right as established by the FTC to receive one free credit report every 12 months without any impact on your scores. There are lots of websites that advertise free credit reports, but there is only one place where you can get a free credit report legitimately. Every other website I have found asks you to sign up for a credit monitoring service that will cost you money each month and really is just throwing money out the window. They give you the report for free, but you are required to sign up for their services. Some free report.

I think it is important to monitor your credit report each year. To get your free credit report, go to annualcreditreport.com. You will be required to complete some basic personal information, including your social security number. This site is legitimate and will actually send you the report from the three agencies at no cost every twelve months if you request it. If you really want a credit monitoring service, I suggest you pay someone like LifeLock (click here) to put your social security number on lock down.

In our next article, we will discuss what to do with the information you are provided by your credit report. We will analyze the report, discuss what to do if there are mistakes, and examine the process of improving your credit score so you can access to the land of milk and honey. Having a credit score of 720+ will allow you to negotiate with Utah mortgage companies for the lowest rates possible.

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Buy a Home in Utah
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