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Stark-Billings County |
Around the House
with Sharon Kickertz-Gerbig,
Extension Agent
January 17, 2006
Understanding Your Credit
North Dakota consumers are now able to get free credit reports, and you may be one of those that has questions about what the different types of information means for your credit rating or credit score.
The credit score, or FICO score, is based on information contained in your credit file disclosure or credit report. However, while you are entitled to a free credit report from each of the three agencies every year, you need to pay for the score itself. This is because Fair Isaac Corporation compiles the scores, which are not free to credit reporting agencies. This web site has a credit score simulator as well as credit education on how to improve credit scores.
While the exact calculation for the FICO score is not made available to consumers, there is an important value to the types of information in your credit report. The actual weightings are important to consider in making credit management decisions, since they may help to show how changes will affect your score.
The categories looked at are:
- Your payment history, including late payments, accounts for 35% of your score
- Your amount and relative level of debt, accounts for 30% of your score
- Your length of credit history, accounts for 15% of your score
- The number of your new credit applications, accounts for 10% of your score
- The types of credit you use, accounts for 10% of your score
The importance of the breakdown of the percentages is to help you as a consumer answer these questions:
- How do I establish credit?
- How do I improve my credit?
Establishing credit requires you to do one thing. You must do business with someone who will report your history to a credit reporting agency. One common misconception is that many utilities do not report your payment information unless you are late. So making on-time payments to utilities may be important to some lenders, it will generally not appear on your credit report or affect your score--except negatively.
Starting with a small limit on a credit card may be a smart way to begin to establish your credit history. Or apply for a card with limited use, such as a gas card. Generally, it takes a minimum of six months to build a credit history, so your score may not be as high as you would like, even with good payment history, because there is not enough time.
Improving your credit may be even more confusing because of the many ads seen on TV and in print media promising to fix our credit. In fact, there is little someone can do to greatly improve their credit in the short run. Credit history (which accounts for 35% of your score) can only be replaced with new history, which is something you alone can do. There is no way to erase your payment history. In addition, the level of debt (which accounts for 30% of your score) cannot be easily amended unless someone will pay this debt off for you. While consolidation may change the appearance of debt, your percentage of debt capacity may or may not improve; it depends on whether you close other accounts.
In general, if you have made regular timely payments and are not constantly maxed out, you likely have a favorable credit score. Scores range from a low of 300 up to 850. The higher your score, the less you will pay for credit. The most important time to know the actual score is when you are shopping for a car loan or mortgage. You can request the score at in place of the report for a small fee, but this should be done strategically.
If you have not been timely with your payments, it may be important to seek help developing a spending plan or a debt repayment plan.
Some people may not have the best credit and may be tempted to seek the help of a credit clinic. The Federal Trade Commission (FTC) cautions consumers to be wary of companies that make claims regarding credit repair. These companies don’t do anything for consumers that consumers cannot do for themselves at little or no cost. If any organization promises to create a new identity and credit file for you by removing late payments, bankruptcies or similar information, it is likely they are committing fraudulent practices. The FTC has filed action against some of these companies. Remember, the best way to improve your credit score is to make timely payments on your debt, and the only way to erase the impact of negative credit history is to create new positive history.
For more information contact:
Sharon Kickertz-Gerbig, Extension
Agent
(701) 456-7665