Understand Your Credit Score

Only since the 1990s have we been able to even see our own credit reports—which is amazing since lenders and other institutions used them for years previous to judge us in terms of risk—and though it has empowered us to be able to do something about our credit history and correct errors, it's also raised many questions. Here are some answers to several reoccurring credit history/credit score questions I've gotten here recently:

Asa asks if there is a way to get both a free credit report and free credit score without having to sign up for a service that charges monthly fees.
So far, you can only get a copy of your credit report from the three reporting agencies once a year through one site and service: AnnualCreditReport.com. Unfortunately, we're still unable to get our credit score for free but because of pressure from both the consumer and Washington, the three agencies will soon offer the same service for your credit score as well. I'll keep you posted here and as soon as that service goes into effect, I'll be shouting it from the hills!

JP comments that when his bank runs a credit report directly, they're coming up with a 100-point spread on his credit score, much different when he runs it through AnnualCreditReport.com. Why is that?
Well, banks and other institutions run their own numbers taking into account factors that may not be listed on your credit report that the three reporting agencies run. Your main credit score is your FICO score—named after the company who coined them—which you can find through myFICO.com (requires a payment). But insurance companies and lenders can add to FICO's reporting requirements and make their own determinations. If your score is substantially different between the bank and FICO, ask them where their score is coming from, how they come to their own calculations, and ask for a copy of their report. If you find errors that aren't even on any of your own three reports, make sure the dates aren't more than seven years out. Some banks go back more than seven years. Investigate those errors and if you still encounter resistance with your bank, head to another one! For more on different credit scores, head to Credit.com.

Mike is wondering if utilizing only one of credit cards (at up to 90% of the credit limit) to take advantage of rewards means a dip in his credit score.
Sorry, Mike—it does. It seems to make sense to use your 'best' credit card to reap the rewards of a great advantage program, however, piling up debt on one card while leaving other's at 0% does bring down your score. It would help your score to spread your debt out across cards and limits so no more than 10% is used on any one card—but of course my best advice is to get rid of all that debt! To really bring up that score, don't just spread your debt around; get it as close to 0% on all cards as possible. Those rewards aren't worth it even if you have a low interest rate. Should someone lose a job and be unable to pay that monthly bill, you're in even bigger trouble. Work that debt down—it's the best thing you can do for your credit score.

Tomorrow: My response to Tim's question: When do you personally feel the overall US economy will turn for the better? Oooo—a good one!

Keep those questions coming!

You can find out your credit score free for 30 days on myfico.com - just remember to cancel before the 30 days or it is $89/yr. --Paul, NC

Posted on: 07 Jul 2008 11:07 P.M.

Isn't it true that credit card companies also do not want so-called "squatters"? Those that have large amounts of credit available but pay their balances off each month, it makes sense that if they have $X.XX amount to lend they will prefer to lend to those that accrue a balance but steadily pay it off. Remember that credit card companies do not only judge a potential debtor based off of risk (i.e. credit score and other 'risk' factors) but also on the potential for income. Having a high credit score means absolutely nothing if the bank doesn't think they won't make a penny off of you. --Nate, NJ

Posted on: 27 Jun 2008 2:08 P.M.

I commend you on a nice article to help people understand credit. I feel this is very important and share in your sentiment that this can be an unfair advantage for consumers since bank and insurance companies use this to determine rates.

However I noticed that the information that you gave to Mike is techincally correct and he would benefit from your information that keeping no more that 10% on a revolving account would improve his score. But the acutally maximum percentage that triggers a negative impact of Proportion of Balances to Credit Limits Too High is actually 30%.

Hope this helps. --Matthew, MO

Posted on: 26 Jun 2008 10:09 P.M.