What do Credit, Credit Scores, and FICO mean to your Credit Report
When it comes to your credit report, there are three types of credit accounts: revolving, installment, and open. You might have thought the discussion would be about secured or unsecured, but in actuality, credit reporting agencies look at credit differently. Speaking of credit reporting agencies—there are three of them. You will want to get to know these three companies intimately: Equifax, Transunion, and Experian.
Revolving credit requires you to make a different payment amount each month based on how much of the credit line you utilize. This sound an awful lot like credit card usage because that is one of the most used types of revolving credit people have. The statistic is that the average household in the USA has at least three credit cards in their wallet. Nerd Wallet did a study that indicates $15,310 of household debt is on credit cards. If you say the average family is two adults and one child, then there are at least three credit cards each in the parent’s wallets and one credit card for the child as well. The accounts can be tied, meaning the parents have opened three credit card accounts with joint access and named their children on one of those accounts.
There are other types of revolving credit. HELOCs or home equity lines of credit are revolving credit accounts because you can withdraw as you need the funds and what you owe is based on how much you withdraw from the line of credit.
Revolving credit is also defined by the monthly payment and interest. Monthly payments with revolving credit require a minimum amount, where the majority of the balance can be paid off later. As long as there is an unpaid balance for the line of credit, there is also interest to be collected by the creditor.
Installment credit requires a fixed payment each month based on the fixed period one has to pay it off. There is also interest attached to the credit, which is also based on the period you have to repay the debt. Installment agreements can either be secured or unsecured loans, such as mortgages, student loans, auto loans, business loans, and home equity loans
Installment credit is acceptable credit. It is not a bad type of credit to have because it helps you build your credit history. However, not all installment credit is treated equally. For example, student loans are weighted differently than mortgages. This will matter whendiscussing certain strategies for building great credit.
Open credit is an account that you must pay off each month, in full. There is no interest and no reduced monthly payment due to an installment agreement. Typically, if you do not pay off this debt each month, then there is a late fee charged by the company. Open credit accounts are mobile phone accounts, charge cards/store cards, and home utilities. Open credit is rarely reported to the credit reporting agencies. Often, a report is made, when a person is delinquent in the payment. Occasionally, this type of creditor will make a report every three months.It just depends on the company. In the last 5 years, many utility companies and cell phone companies have started running a person’s credit, weighing their credit history and scores, and determined fees and plans. It is due to delinquency. A high number of delinquent accounts exist because a person moves, ignores their utility payments, and the company has trouble tracking them down.
You might have noticed a change, when you switched your internet service provider or cable TV provider. These companies have started asking for social security numbers in order to run your credit history. It means a tighter industry, where people can no longer be delinquent, and the potential for more accounts to appear in your credit history. The changes only matter, if you have consistently been delinquent on these accounts. If you pay on time every month, you don’t have to worry about the company sending a report.
Credit Scores and FICO
Experian, Equifax, and Transunion all provide you with credit scores, but you have to understand that not all credit scores are the FICO score. FICO scores are created by the Fair Isaac Corporation. No one knows for certain how the Fair Isaac Corporation creates their score because it is a proprietary formula. It has been released that the score is based on five categories, which are weighted differently with regard to importance. The se categories are:
- Payment History
- Amount Owed
- Length of History
- New Credit
- Type of Credit
To break it down, each contributes with a percentage towards the score, where the payment history is 35%, and type of credit used is 10%. The other percentages are 30%, 15%, and 10%, respective of the order listed in the bullet points. The FICO score places a lot of emphasis on the payment history and amount owed. Payment history assesses things like being on time, late, delinquent, or going through a bankruptcy as more important than the types of credit and new credit you might have.
One of the biggest questions that has come up in recent years, particularly since 2008, is the discrepancy of credit scores. For example, Transunion started offering credit scores via certain credit cards like Discover. Yet, when a person went to buy a car loan, the score on their Discover card account was different than the FICO score used for the loan.
There is a consumer version of your credit score that can be released by the three credit reporting agencies. They use a slightly different formula, as do some of the credit card companies. Unless you have a piece of paper that states the score is from FICO, such as those handed to you by lenders when you go to get a loan, you may be seeing your consumer credit score versus your FICO score.
Before you start using various strategies to repair your credit score and build better credit overall, you have to be willing to pay for your credit score either through Myfico.com or one of the three credit reporting agencies. If you see a score for free, it is generally the consumer score versus the one using the proprietary calculation FICO uses. The difference between them will matter.
The FICO score is between 300 and 850, with higher scores indicating lower credit risk. If you walk into a bank asking for a mortgage thinking you have a score close to 800, only to find out your FICO score is 750, you are going to want to know why, and what you can do to get the other 50 back. The thing is you haven’t lost it, in the sense that something is harming your credit, but that FICO never provided it to you.
Now that you have a clear understanding of what credit is, the consumer credit scores, and FICO, you are ready to discover some strategies that can be of use to build great credit and raise your credit scores.