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Money Wise November

You and Your Credit Score

You & Your Credit Score

From a young age we're taught that in polite company emotionally charged topics like religion, politics and money should be avoided, and your credit score definitely falls into the 'money' category. Although we avoid the topic, it doesn't mean the conversation is any less important. In fact, it's one of the most important conversations you can have with yourself because it has far-reaching effects on your present and your future. This month, we're going try and answer some questions, share some do's & don'ts, and take a look at some inside info. So let's dive in!

Your Credit Score is essentially a representation of your financial character. Are you managing your debt load effectively? Can you be relied upon to pay your bills on time? Do you have a history of getting into debt trouble? And if you think about it, these are the sorts of questions you would be asking if someone were to ask you for a loan. So it's only logical that a lender needs to know these things about you, and your credit score is where they start.

A credit score is a number, between 300 and 850, that summarizes your creditworthiness. If that score is low (or "bad") then the loan is considered high-risk and the lender will have to carefully consider whether or not they can trust you to pay them back so you may or may not get the loan. And if you do, well then you're going to get hit with a higher interest rate, which well, just plain sucks.

How are credit scores calculated?

Although there are different varieties of credit scores, the most widely used one is called FICO, named for its inventor, Fair Isaac Corp (NYSE: FICO). It considers such factors as credit account payment history and borrowing capacity-but not age, income or net worth-to calculate a single number called a FICO score. It can range from 300 to 850. Anything above 750 is considered excellent. Below 550 is trouble.

At its heart, a credit score is nothing but a mathematical prediction of your ability to pay your debts. But it can also impact other areas that may not be as obvious.

According to myfico.com, this data is grouped into five categories. The percentages reflect how important each of the categories is in determining how your FICO Scores are calculated and are based on the importance of the five categories for the general population. For particular groupsfor example, people who have not been using credit longthe relative importance of these categories may be different.

Your FICO Scores consider both positive and negative information in your credit report. Late payments will lower your FICO Scores, but establishing or re-establishing a good track record of making payments on time will raise your score.

What should I do if I find a mistake on my credit report?

If you find a mistake on your credit report it's important to get it corrected as soon as possible. The information on your credit report is used to calculate your credit score, so inaccurate or incorrect information can hurt your score and subsequently cost you money. To get a mistake corrected, contact the credit reporting agency that is showing the incorrect information (Experian, TransUnion, Equifax). The credit reporting company must investigate the item in question usually within 30 days. Lenders and Credit Bureaus alike must follow government regulations. The Fair Credit Reporting Act has been amended several times in the last several decades to provide protection for consumers. The most sweeping changes came in the late eighties when the burden of proof for inaccuracies migrated from the consumer to the creditors. My advice if you see a discrepancy, file a dispute.

10 Things You Should Know About Credit Scores

You may have heard the terms credit history and credit score. Consumers who hope to borrow money may know that the lending industry uses credit histories and credit scores to help determine whether they get approved for a credit card, loan or mortgage. But what exactly is a credit history, what is a credit score -- and why are they so important?

1. Credit Reports Are Different From Credit Scores

Credit scores are calculated using the information on your credit reports, which includes details of your credit accounts, how often you apply for credit, debt collection accounts and some public records, among other things.

2. Your Scores Are Based on 5 Core Factors

Those factors are (in order of importance) payment history, credit utilization, average credit age, account mix and inquiries.

Payment History: Accounts for roughly 35% of your score. This one is pretty self-explanatory, paying your bills on time will help keep your scores high, while late payments, charge-offs, and collections will hurt. If you're trying to improve your credit rating, avoid the latter at all costs. And while this category makes up the largest single chunk of your scores, it's important to understand that 65% of your score is determined by other factors. Meaning that there's more to it than simply making your payments on time.

Amounts Currently Owed: 30% of your score is based on the amount of debt you're currently carrying -or more specifically, the amount of money you currently owe your creditors. While this category looks at the total amount that you owe (credit cards, home loans, car loans, etc.), it's the credit cards -or revolving accounts - that have the most impact on your credit score. In order to maximize your scores in this section, you should keep your balances in relation to your credit limits as low as possible.

Length of Credit History: Consisting of roughly 15% of your score, this category specifically measures looks at how long you've had credit. It does so by reviewing all of your accounts and looking at the opened dates. Obviously, the longer you've had credit, the more points you'll earn in this section. This is just one of the reasons why it's not a good idea to close old, good accounts. Why would you want to lose the good credit history?

Types of Credit: Worth 10% of the points in your credit score, this section is looking for a healthy mix of accounts. Diversity is key - having a mix of different types of accounts including credit cards, auto loans, mortgage loans, etc., will insure you do well here.

Searches for New Credit: This section accounts for 10% of your score. Basically, when you apply for credit an inquiry will post to your credit report showing that you're seeking credit. Having too many inquiries in a short period of time can hurt you. As a general rule of thumb, try to avoid excessively shopping for credit - only open a new credit account when you really need it. (Tidbit: By law inquiries remain in your credit reports for two years. However, only inquiries in the last 12 months are considered in your credit score calculation.)

3. You Can Get Your Scores & Reports for Free

You're legally entitled to a free copy of your annual credit report from each of the three major credit reporting agencies: Equifax, Experian and TransUnion. You can get your credit scores for free from various places, including Credit.com, CreditKarma.com, etc.

4. Checking Your Own Score Won't Hurt It

Only hard inquiries (aka when a lender looks at your credit when you apply for a loan or credit card) have a negative impact on your scores, and the effect is small and temporary.

5. There Are Many Different Scores & There Are Different Credit Score Ranges, Too

When you're trying to figure out where you stand or if your credit is improving, make sure you are comparing the exact same score and that you know the range wherever you're getting the score from should tell you that information. For example, a 750 FICO score is not necessarily equivalent to a 750 in another scoring model.

6. Your Credit Can Help You Spot Fraud

If someone runs up a large credit card bill or takes out credit in your name, it will show up on your credit report and affect your credit score. Watch your score for changes you did not anticipate.

7. Your Credit Score Can Cost You Thousands Over a Lifetime

A low credit score means you'll probably have to pay higher interest rates on things like credit card balances and mortgages. You can see an estimate of how much your credit will cost you using the Lifetime Cost of Debt Calculator.

8. Joint Accounts Affect Your Credit Scores, But There Aren't Joint Scores

If you open a loan or credit card with a partner, the account activity will be reflected on both your credit reports. Joint accounts are different than authorized users, but whenever you share credit, make sure you're aware of who will be responsible and who will be affected if a payment is missed.

9. Negative Information Eventually Ages Off

Different kinds of negative information will remain on your credit report for different periods of time (bankruptcy is an exception to this, for example), but generally, negative information ages off your report and no longer affects your score after 7 years.

10. Credit Scores Aren't the Only Things That Matter for Lending Decisions

A credit score isn't the only thing lenders consider when reviewing applicants. If you have no credit or poor credit, you may be able to secure a loan through an alternative lender, and in some situations, making a personal appeal or giving a lender more context to your credit report can help you access financial products.

Surprising Ways a Bad Credit Score Can Affect More Than Credit

If you're not buying a house or car anytime soon, and you rarely use credit cards, you may think your credit score is not that important. But with a growing number of companies using credit history and credit scoring to decide whether or not they want to do business with you, what's on your credit report can have far-reaching affect, meaning even in aspects of your life where you wouldn't expect it.

Consider these five unexpected ways your credit history affects your life:

1. Your living arrangements

It's against the law for landlords to discriminate against applicants based on factors such as race or gender, but it's acceptable for them to base leasing decisions on a tenant's ability to actually pay the rent. If your credit report shows you're inconsistent about bill-paying, a landlord might interpret that to mean you wouldn't be able to pay rent in a timely manner.

2. Your education

Student loans used to be the easiest kind of loan to get, with the most lenient repayment terms. However, the credit crunch has changed things, and schools and lenders that were once relaxed about student loans are now more demanding. A low credit score could make it difficult for you to obtain the student loans you need to attend your college of choice.

3. Your cellphone

Say two years ago, when you entered into your current cellphone contract, your credit score was pretty good. The cellular provider probably approved your new account application right away. Now, imagine you would like to switch providers at the end of your contract, but your credit report has a few blemishes and your score has dropped significantly, thanks to the recession of the past few years. The mobile company you want to switch to may require a hefty deposit from you before they'll open a new account in your name.

4. Your employability

A growing number of employers (around 50%) are considering credit history as another way to differentiate potential candidates from the pack of applicants. While your experience, education and skills will always be meaningful in your job hunt, a low credit score or spotty credit report could mean you have to work harder than a high-scoring competitor to win a potential employers interest.

5. Your pets

What does credit have to do with Fluffy or Fido? A lot, actually. Even if you pay cash for your pets day-to-day needs like food, emergencies can arise when you'll need credit. For example, if the vet says your dog needs an expensive operation, your good credit may qualify you for a payment plan to cover the cost. In that scenario, your credit score could help you immediately secure needed treatment.

6. Your Auto Insurance

Similar to a credit score, your auto insurance score is calculated by analyzing the data in your credit file. Auto insurance scores can vary by credit reporting bureau, and is one of the factors used to determine your auto insurance rate.

On average there is a correlation between people with good credit scores and good auto insurance scores. Comparable to how a low credit score indicates a risk to creditors, a low auto insurance score generally indicates that you are more likely to file an insurance claim, which results in losses for an insurance company. If you're interested in seeing your auto insurance score, CreditKarma.com provides consumers with both scores directly from TransUnion, one of the three major credit report agencies, free of charge.