Credit History & Credit Score (FICO)

 

Basics

 

We all create a credit history, everyday.  OK, generally as we get older and have to pay for things ourselves, be it a cell phone, apartment, credit cards.  If we get a cell phone, we sign a contract saying we are going to pay our bills.  If we pay our bills completely and on time, that becomes part of our credit history.  If we are late, that is reported too.  Not only does the phone company keep track of that information, but they share it with credit bureaus who keep tabs on all our credit spending, from utility bills to loans to credit cars, and just about everything else you use money for, except for cash. 

These Credit Bureaus then assign you a FICO (see below) or credit score.  Potential lenders will use this whenyou want to borrow money in the future, let's say for a car, house or anything else.  Lenders will use this history/score to decide if they should lend you money (extend credit).  Lenders use this score to calculate how much of a risk they will charge you to borrow money.  As we get older we will probably borrow money and then pay it off.  This could be a short term loan (such as a telephone bill) or a long term loan (such as a car or college loan).  Based on how much credit you owe, how promptly you pay your bills and how much you pay on your bills, credit bureaus will review your history and then issue you a credit score (FIC)). Therefore establishing a good credit history, thereby earning a good credit score, will be critical when you wnat to borrow money. 

 

Credit Score (FICO)

When you apply for credit, the lender will want to know what type of risk you are and will pull your credit history or FICO (Fair Isaac Corporation— credit scoring model) score.  Check out the Website: http://www.myfico.com/Default.aspx.  There are three major credit bureaus: Experian http://www.experian.com, TransUnion http://www.transunion.com ) and Equifax http://www.equifax.com/home/en_us that monitor your credit history.  Adjustments are made to your credit score by these bureaus as your buying and paying habits change.  Your FICO score helps a lender decide what kind of risk you are likely to be.  The higher the credit score and the lower the risk, the more likely a lender will extend you credit at a low rate.

 

 

Formula Used To Calculate Your FICO Score

  • 35% on your payment history
  • 30% on the amount you currently owe lenders
  • 15% on the length of your credit history
  • 10% on the number of new credit accounts you have opened or applied for (fewer is better)
  • 10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)

 

What Does My FICO Score Mean?

FICO scores range from 300 to 850.  Here is what they mean to a lender:
  • Excellent: Over 750
  • Very Good: 720 or more
  • Acceptable: 660 to 720
  • Uncertain: 620 to 660
  • Risky: Less than 620

Credit Card Tips For Teens

Here are some credit tips for teens that can keep you out of trouble and help you maintain a high credit score. 

  • Don’t take out too many credit cards or loans (the fewer the better)

  • Make your payments on time

  • Pay as much as you can

  • Keep your borrowing below the maximum

  • Don’t apply for several credit cards at one time

  • Manage your credit wisely and you will improve your score

     

Periodically pull a credit report on yourself.  It will show you what your credit score is.  Review it carefully.  If it is not as high as you expect, determine why.  Is the information on the report accurate?  Maybe someone is using your credit or there is a problem with the information—you must correct it to boost your score.  If it’s lower than a previous report you need to find out why.  Here’s another Website to give you more information on credit reports: http://clarkhoward.com