Taking the mystery out of credit

Credit scores" play an important role in today's lending environment, yet how they are applied is often a "mystery" to most of us.

With access to a variety of new resources, we are now empowered to learn about and manage our personal credit and protect our credit identity from fraud and theft.
A credit score is the result of a mathematical equation that evaluates many types of information that is on our credit reports. Lenders with whom we have applied will usually review our credit reports and credit scores along with other factors, such as our ability and liklihood to repay debt.

Credit scores are also often called "FICO scores" because most credit scores are produced from software based on a model developed by Fair Isaac and Company ("FICO"). For more information about FICO scores, visit www.myfico.com.

What Makes Up a Credit Score?

The FICO score generally ranges from 300 to 850, and a higher score indicates a lower credit risk. FICO scores are calculated from many sources of information in our credit reports, which is based on the importance of the following five categories for the general population:

35% - Payment History (Were payments made on time?)
30% - Amounts Owed on Accounts (Is the balance owed close to the limit?)
15% - Length of Credit History (How long have our accounts been open?)
10% - New Credit (How many new accounts have been opened?)
10% - Types of Credit Used

The following are not in our credit score...

-Our race, color, national origin, sex, age, marital status
-Our salary, occupation, title, employment information, or residence address
-Any interest rate being charged on our credit accounts
-Any items such as family/child support, rental agreements, credit counseling participation

Our FICO score is a "snapshot" of our credit history at a given point in time, and can change based on factors that make up our credit score.

-Late Payments - Pay bills on time. If we miss a payment, we need to get current.
-Credit History - When we pay off a debt or collection, or close an account, the credit reference remains on our credit report for a minimum of seven years.
-High balances - Keep outstanding balances low on credit cards and other "revolving" accounts.
-New Credit - If we have been managing credit for a short time, we shouldn't open a lot of new accounts.

Our score can improve by managing credit responsibly over time and following some basic tips:

-Making sure the information in our credit report is correct. We are entitled to one free credit report annually from the three credit bureaus - Experian, TansUnion and Equifax. We can visit www.annualcreditreport.com to obtain our free reports.
-Reviewing our credit reports for accuracy (date opened, account balance, account limit, last activity) and having incorrect or erroneous information updated.
-Paying down high credit card and revolving account balances, but not closing the account. We shouldn't apply for credit that we don't need - excessive credit report "inquiries" can lower our scores.
-Avoiding the transfer of credit balances from one account to another just to take advantage of low introductory interest rates. The combination of "inquiries" and "new accounts" can negatively impact scores
-If possible, avoiding "finance company" type of credit accounts, including "90-day" and "12 monts same-as-cash" acccounts. Mortgage loans, installment loans and revolving credit card accounts impact our scores more favorably than finance company accounts.

David Edwards
REALTOR®
Keller Williams Realty Southeast Sound
425-890-8045
E-Mail: david@davidjedwards.com
Website: http://www.davidjedwards.com
Blogsite: http://www.davidjedwards.com/renton-info-blog.asp

David J Edwards is a full time real estate agent and REALTOR® with Keller Williams specializing in Residential Real Estate for buyers and sellers in Renton and Newcastle Washington.