I’m sure that many of us just love the idea of being judged by a single number. However, that’s how the world is. Welcome to the world of the credit score.
So… What’s A Credit Score, Anyway?
A credit score is a number assigned to someone which indicates their ability to repay a loan. It’s generally based on your personal history of loan repayment, and is used for more than just credit cards. In many cases, businesses will ask for your credit score to determine how much to charge for home or auto insurance. They’ll even ask for your credit score to determine how much of a deposit they’ll ask for in order to offer you cable or satellite television or mobile phone service.
Generally speaking in the United States, credit scores range between 300 and 850. An 850 is the best possible score, and a 300… well, that’s a really, really good time to speak with a credit counseling service.
Here’s the problem, though: If you’re in business for yourself, it’s a very, very good idea to have a credit card. Despite the fact that going into debt is bad, running a small business means needing access to capital on short notice–and a credit card’s the best possible way of doing this.
How They Determine Your Credit Score
In the United States, the most widely used credit score is one called FICO, which is set by a company called Fair Isaac Corporation. Fair Isaac comes up with your credit score by using a number of algorithms which sift through a massive amount of data. That information is then used by credit card companies and mortgage lenders to decide whether to extend you credit… or, as is often the case these days, how much of a deposit to charge you for setting up a new cable television or smartphone account.
Several credit reporting companies, TransUnion, Equifax, and Experian, collect the bulk of the information used to determine your credit score.
What helps improve your credit score? The age of your accounts (Someone in their sixties, for instance, has an advantage over someone in their twenties), how little of your credit is utilized (low balances on your credit cards is good), lack of late payments, no debts being sent to collections, and a relative lack of “hard” credit inquiries like the ones you get when applying for an auto loan or credit card.
A few factors, such as using more than 30% of the collective balance on your credit cards, having debts sent to collection, or a consistently late payment history, can negatively impact your credit score. Medical debt stays on a credit report for seven years, along with Chapter 13 bankruptcies; other bankruptcies stick around for 10 years.
But just to complicate things, a few other credit scores beyond FICO’s are now gaining popularity in the market. An alternative called VantageScore is being used by some vendors, and Transunion recently came out with a score of their own called Transrisk. With that said, FICO is by far the most popular.
Finding Out Your Credit Score
Here’s the good-ish news: Finding out your credit score isn’t very hard, and is pretty risk free.
If you’re looking for a current list of where you can view your credit score without paying, Wikipedia is the place to go of all places. Wikipedia has a consistently updated Comparison of Free Credit Report Websites that’s well worth checking out.