Your Credit Score | Liz Pulliam Weston

Summary of: Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future
By: Liz Pulliam Weston

Introduction

Welcome to a world where even a three-digit number can shape your financial well-being. Our mobile book summary turns the pages of ‘Your Credit Score: How to Improve the 3-Digit Number That Shapes Your Financial Future’ by Liz Pulliam Weston, revealing a detailed explanation of credit scores and the key factors affecting it. Discover the contrast between FICO and VantageScores, their respective implications, and how to improve and maintain a favorable credit score. In the process, debunk several myths that surround credit management while mastering essential techniques that will help you sail smoothly through financial waters.

The Secret World of Credit Scores

Credit scores have been a well-guarded secret until recently. In the 1950s, engineers Bill Fair and Earl Isaac developed a mathematical formula to predict creditworthiness, but the specific factors used to determine credit scores were hidden from consumers for decades. Thanks to the Fair Credit Reporting Act, Americans are now able to access their credit reports and scores from the three major credit bureaus. Lenders use credit scores to determine whether to loan money and at what interest rate. FICO scores range from 300 to 850, with scores above 700 being favorable and scores below 600 indicating high risk. It’s crucial to handle credit problems because they not only affect credit-worthiness but also the financial future.

Factors Influencing Your Credit Score

FICO’s Formula Explained

Your credit score is a crucial number that impacts your financial future. The Fair Isaac Corporation (FICO) algorithm calculates your score based on five factors. Payment history is a significant factor, accounting for 35% of your credit score. Late payments, collections, bankruptcy, and liens negatively impact your score. The amount of debt is another critical factor, comprising 30% of your score. High credit card balances and maxed-out accounts hurt your score. The age of your accounts influences 15% of your credit score. The longer your credit history is, the better your score. Lenders also look at the average age of all your accounts. Last credit application carries 10% weightage. Opening several accounts in a short period can lower your score. Every credit application authorizes a creditor to access your credit history, which can cost you points under some circumstances. Lastly, lenders prefer a balanced mix of credit types like installment loans and credit cards, constituting the remaining 10% of your score. Be aware of these factors to maintain a good credit score.

VantageScore vs. FICO

In 2006, the three major credit bureaus launched VantageScore as an alternative to FICO. VantageScore ranges from 501 to 990, dividing it into five categories: “A” (highest) to “F” (lowest) credit. Although VantageScore uses the same factors as FICO, it stresses on how much credit you’ve utilized and still have available. It outperforms FICO in some test cases but is yet to gain acceptance from rating agencies and mortgage-finance agencies. Moreover, the accuracy of VantageScore in identifying defaulters is debatable. Despite its subtle variations, the quality of your credit report remains the cornerstone of any credit score calculation.

Credit Score Improvement

If you have a poor credit score, there are steps you can take to improve it. Begin by ordering your reports from Experian, TransUnion, and Equifax and carefully checking your accounts for errors. Dispute any errors both in writing and online, as federal law requires credit bureaus to investigate these mistakes. Pay on time, as even one late payment can lower your score by up to 75 points, and reduce your debt by focusing on accounts closest to their credit limit. Keep your accounts open, as old accounts in good standing can add points to your score. With persistence and consistent effort, you can improve your credit score.

Credit Score Myths

Many people fall for credit score myths, which can hurt their scores. Checking your credit report, shopping for rates, using credit, and seeking credit counseling may not harm your score as myths suggest. On the other hand, bankruptcy is the worst mark on your credit report but doesn’t mean you can’t get credit again. Many people obtain credit after their cases have been discharged; however, they pay steep interest rates. Lenders want to see evidence of your ability to use credit responsibly over time; hence, use your credit card, even if you pay off the balance every month. Finally, most lenders view credit consolidation and payment plans negatively.

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