Credit And Debt Management: Credit Reports And Scores

by Cathy Pareto

It's funny how things come to define us as people. Sadly, our credit score is one of those things. A credit score can either be a scarlet letter or one-way pass to easy money; it's probably wise for us to begin our discussion with how the credit-reporting process works. A good credit score can translate to much lower interest rates for mortgages, credit cards and auto loans, resulting in significant savings for you.

Credit Bureaus
The term "credit bureau" can be used interchangeably with the term "credit reporting agency". These organizations collect credit information about credit consumers by using public records, creditor data, employers and more to compile each person's credit history. The organizations make this information available to current and prospective creditors, employers, landlords and others who are legally allowed to request it. The three credit reporting agencies are: Equifax, Experian and TransUnion.

Credit Scoring
These agencies use the data they've collected about you to formulate a credit score, a value that will later be used to determine your creditworthiness, or perceived risk, to creditors. Some of the factors considered in calculating the score include the amount you owe on non-mortgage accounts, such as credit cards, your payment history, number of credit lines open, age of credit file, number of recent credit report inquiries and credit history. (Get a look at the various components of the personal and financial data that go into this dossier in Consumer Credit Report: What's On It.)

The FICO® score is the one most widely used by lenders. All three credit reporting agencies have their own names for the FICO® score: Equifax calls it BEACON®, Experian calls it the Experian/Fair Isaac Risk Model, and TransUnion calls it the FICO® Risk Score. Despite the different names, however, the scoring method is consistent across all three.

Most people's FICO scores vary slightly by agency because some lenders only report credit data to one or two credit bureaus and not to all three. The FICO score has a scale ranging from 300 to 850 (the higher the score, the better), but most people's scores tend to range between 600 and 850. However, other factors, including income and employment history, are also considered when consumers are evaluated for creditworthiness.

Credit Score Components
So, what are the main factors of your credit score? The most important determinant is your payment history, which counts for up to 35% of your score. Next is the amounts owed, for 30% of your score, followed by length of credit history, which makes up 15%.

Many different things can negatively affect your credit score, so be sure that you know what they are so you can avoid them:

• Late payments
• Foreclosure
• Bankruptcy
• Judgments
• Repossessions (the act of a lender taking back a valuable asset, such as a car, if you are unable to repay debt)
• Too many inquiries (a credit inquiry occurs any time you apply for a new loan or line of credit (LOC))
• Charge-offs

One of the best methods to avoid any of the aforementioned credit challenges begins with a budget. A budget is merely a guideline of how you spend and how you should allocate your resources. It is intended to track your fixed and variable expenses as well as your savings allocations. A budget is an essential tool for any debt-management plan in that it gives you a better understanding of your financial situation. Knowing how and where you spend your money is an essential building block to fiscal responsibility and offers the best defense against unforeseen or unwanted credit disasters, such as foreclosure or bankruptcy.


Credit And Debt Management: Building Credit From Scratch