What Is A Credit Score And How Can You Get Your Free Credit Report?

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What Is A Credit Score?

If you have a credit card or if you’ve ever applied for a loan, tried to buy a home or a car, you’ve probably heard of FICO.

FICO stands for Fair Isaac Corporation, a company that began in the 1950s. It was founded by Bill Fair, an engineer by trade, and Earl Isaac, who was a mathematician.

They created their initial credit rating system in 1956. Since then FICO has developed more and more complex credit scoring software that’s used to predict how credit worthy a person is.

It affects you directly because the systems “says” that lower your score is, the more likely it is that you will default on a loan. Hence, whomever is considering lending you money will charge you higher interest rates in order to compensate for the possibility of default.

When financial companies consider whether or not to offer you a loan most, go to one of the three major credit reporting agencies to get your credit score – either Experian, Equifax, or Transunion.

Credit scores range from 300 to 850. Most people in the United States have credit scores that range from the 600s through the 700s.

Because of recent tightening of credit, you will often need a credit score of at least 700 to be approved for a mortgage. And generally higher numbers mean lower interest rates.

Here are the factors that FICO takes into account when calculating your credit score:

• Payment history: 35 percent – This is so important that you should never pay late!

• Amounts Owed: 30 Percent – Don’t borrow too much in proportion to your credit history! Try to keep your balance under 50% of your credit line.

• Length of Credit History: Older credit cards with regular on-time payments help build good credit. Don’t cancel your older credit cards.

• New Credit: Number of recent accounts opened, number of recent credit inquiries – applying for a lot of loans at the same time hurts your credit.

• Types of Credit Used: Credit cards, retail store accounts, installment loans, mortgage loan, etc.

You can look at your credit report for free by going to http://www.annualcreditreport.com and requesting it. They are obligated to provide you with one free copy of your credit report every 12 months. They are the only site authorized by the Federal Government to provide this service.

The Federal Trade Commission recommends that you link to them directly from their site http://www.ftc.gov/freereports to make sure that you are going to the official site.

To see your credit score – not your credit report – you must purchase it, from one of the three credit reporting agencies, Equifax, Experian, or Transunion.