Dunnan on Dollars

  Personal Finance Tips from Nancy Dunnan

Understanding your credit score

When lenders, such as mortgage brokers and banks, consider your creditworthiness, they generally rely on how you rate on a scoring system based on information in a credit file from one of the three main credit reporting agencies. They are: Equifax, Experian and TransUnion. The Fair Issac Corporation generates the most commonly used rating, known as a FICO  score.

It is one of life's most important numbers as it is checked out by potential lenders, landlords, employers and others. You need to take good care of it. Not only will it determine whether you get a loan, but it will also be a major factor in determining your loan's interest rate.

A poor credit score could also mean you won't get a business loan, a car loan, an apartment, a job, insurance coverage or a private school loan.

Knowing the numbers

FICO scores range from 300 to 850. In general, 750 to 850 is considered excellent. Between 675 and 750 you'll get a loan but at a higher interest rate. A score below 600 or in some situations below 675, signals lenders that you are a high risk.

Your score is based upon five pieces of information:

1) Your payment history. This includes how often you have made late payments as well as whether you've ever declared bankruptcy.

2) How much you owe. This includes balances on all your accounts and also how close you are to your credit limits.

3) Length of your credit history. The longer you've been doing a good job managing credit, the better.

4) How much of your credit is new credit. Applying for new credit temporarily lowers your score.

5) Types of credit. This includes how many different kinds of credit you have, such as credit cards, auto loans, business loans, mortgages, etc.

Getting a free copy

You've undoubtedly seen lots of Internet adds promising you a copy of your FICO report. But many of them require a credit card. Or, they are part of a trial subscription to a newsletter, which unless you cancel by a certain date, will cost you money.

Don't fall for these. Instead head for www.Credit.com . Here you will get a free Credit Report Card that explains if your score is excellent, good, fair, poor or bad. The company uses information from TransUnion, one of the three major credit bureaus mentioned above.

Credit.com also explains the information that goes into your report card. You'll find out, for example, how many late payments have been recorded.

Improving your score

If you learn that your credit score does not fall into the "excellent" category, you must make every effort to improve it. To do so, begin by paying your bills on time and keeping balances on all accounts low or ideally at zero. And, pay off debt rather than moving it among credit cards. You should also avoid applying for new credit because too many applications lower your score.

Bottom Line: Keep the 10% solution in mind. To maintain a high FICO score, use no more than 10% of your available balance on any single line of credit.

Reading your credit reports

In addition to knowing your FICO score, it's important to review your actual credit reports. You may find errors, which can be corrected. These reports are assembled by three credit bureaus -- TransUnion, Experian and Equifax.

TIP: A relatively new law requires the credit bureaus to give you a free report every 12 months. This takes place at: www.AnnualCreditReport.com . (Note: that's once every 12 months, not once a year.)

For Further Information: www.myFICO.com

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If you want to suggest a column topic for Nancy, drop her a line.