A Brief Review...

Credit ratings, or credit scores, are provided by three separate rating agencies based on an individual's credit history.  Meaning every bill payment, loan payment and credit line you have ever had is compiled as part of the calculation.  The three credit bureaus (Equifax, TransUnion & Experian) each have their own scoring system, but they are all based on the original formula developed by the Fair Isaac Corporation (FICO).  The final credit score falls in the range of 300 to 850, with higher scores reflecting a better credit rating.

The most obvious use of the credit rating is access to borrowing via loans or credit from banks.  Home mortgages, car loans, school loans, credit cards and more are affected.  As your credit score goes down, you are perceived as a higher risk of late payments or loan default.  Low credit scores can result in denial of credit access, or the more common path of being charged a higher interest rate.  In addition to banks and credit card companies - landlords, local merchants, employers and insurance companies can use your credit score in decision-making and pricing.  For example, car insurance companies use a variation of a credit score formula that affects premium cost.

Actual credit score formulas are not publicly available, but the following is a good guideline of what the score is based on.  These values are approximations: 

Can I Change MY Score?

Improving your credit score starts with a review of your current credit history.  You can do this once a year for free by visiting AnnualCreditReport.com and completing the online process or by completing and mailing the printable request form.  Getting and reviewing your credit reports is an important step because there can be errors on your report that affect your score.  Errors can be submitted for correction with each bureau. 

Note: your free credit history will not include your actual credit score.

Visit www.whatsmyscore.org/estimator to get a FICO score estimate.

Once you have reviewed your reports and resolved any errors, the next step is to focus on the areas that negatively impact your score.  First, pay your bills on time.  Second, close unused or unneeded accounts (it's best to keep older accounts and dispose of newer accounts). Third, contact remaining credit providers and request an increase to your credit limit.  You may be able to offer incentive by consolidating account balances with them.    Third, keep credit cards under 75% of the available credit limit with a longer term goal of 25%.  Fourth, maintain employment.  Frequent job changes or employment gaps suggest higher risk.  Lastly, limit the number of new credit accounts you open or apply for.  Each account application generates a credit inquiry, which can reduce your credit score. 

Note: asking for your own credit report does not count as a credit inquiry.

As you can see, your credit score is important.  Generally, a credit score below 500 would hinder credit access, while a score over 720 provides excellent access and rates.  Improving your credit is worth the effort because loan interest rates can vary by as much as 60% from the highest to lowest credit rating.  Get your credit reports, review them and construct a systematic process for improving it.  It is tedious, but it is good for your financial health!