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Credit scores: Do you know yours?

December 13, 2010|Lynn Little

Credit can be a successful finance management tool.

Using credit allows you flexibility in managing your spending plan to purchase goods and services when you need them, not when you have the cash on hand to pay for them.

You are offered credit because you considered trustworthy and will repay your creditors within a stated period of time.

Offers and availability of credit to you individually is determined by your credit score. Your credit score, generated by using information in your credit report, is designed to predict your credit risk and your credit worthiness.

In addition, credit scores are used to determine the interest rates charged for a loan or credit card.

What factors influence and determine your credit score? The credit score, based on a FICO (Fair Isaac and Company) formula analyzes your credit history based on five categories: payment history, amount you owe, length of your credit history, new credit and your credit mix.

You will likely have different credit scores from each of the three major credit bureaus (Equifax, Experian and TransUnion), as the information varies from one credit bureau to another. Not all creditors report to every credit bureau. For more information on credit scores, go to www.myfico.com.

Payment history is 35 percent of your score, coming from your credit account payments with most recent payments counting more than older payments. If you have consistently paid your bills on time your score will be higher.

Amount you owe is 30 percent of your score. This is based on your current debt load and how much you owe on all of your accounts, if you generally carry an unpaid balance on credit card accounts. Getting credit only when you need it and using it below your credit limits leads to higher scores.

Length of your credit history, based on how long you have used credit, is 15 percent of your score.

Ten percent of your score is based on new credit, including recent credit inquiries and recently opened accounts. You will be scored lower if you have been loading up on credit.

Don't get a credit card just for the 10 percent discount on the day you open the account. Having access to lots of credit, even if you do not use it, lowers your credit score. If you don't want to receive unsolicited credit offers, call 888-567-8688 and your name will be removed from all three credit bureaus for possible solicitation purposes.

The final 10 percent of your credit score is based on the mix of credit accounts you have, such as revolving and installment credit.

Personal and demographic information, such as age, race, address, marital status, income and employment don't affect your score.

• Assess your credit status. Request a copy of your credit reports. Under federal law, consumers are entitled to receive on free copy of their credit file once a year from each of the three major credit bureaus: Experian, Equifax and Trans Union. See www.annualcreditreport.com for details. Credit reports do not include a credit score.

• Obtain your credit score. Credit scores are three digit numbers that range from 300 (worst) through 850 (best). Credit scores are available online for a fee from www.equifax.com and www.myfico.com.

If you have paid a loan application fee that includes a credit check you may be able to obtain your credit score at no charge.

Credit scoring helps lenders make objective decisions and determine the amount of risk associate with lending to a particular borrower. Your credit score is a snapshot of your credit history at a particular point in time. Paying bills on time and not becoming overextended are the two best ways to improve your credit score.

Lynn Little is a family and consumer sciences educator with University of Maryland Extension in Washington County.

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