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Fri, March 22

Practical Saver: Improving your credit score - Part I

The mysterious world of credit scores leaves many consumers confused about the impact of opening and closing credit cards, inquiring about credit history, the number of accounts to have open, and the amount of debt to carry. Consumers are even more confused about how credit scores are calculated and the impact they have on lenders' decisions.

Credit scores are actually very secretive. We may have an idea if our credit picture is bad, good or great, but the elusive credit score is usually a number unknown to consumers. At the same time, however, this score is heavily relied upon by lending institutions. So, how is this figure calculated, and how do consumers learn about their number?

A credit score is a number that summarizes the credit risk of a consumer. The score is derived from a snapshot of the consumer's debt history and their credit report at a certain point in time. The most common score is the FICO score. Lenders purchase the FICO scores from the three major credit-reporting companies: Equifax, Experian and TransUnion. This credit score influences the amount of credit a lender will issue, as well as what interest rate they are willing to offer the customer.

FICO was founded in 1956 and utilizes advanced math and analytics to arrive at the credit score. The final results range from 300 to 850. The scores are then categorized as: Bad, Not Good, Good, Very Good and Great. There are several factors that influence the overall FICO rating and each factor is weighted to arrive at the final score. The key factors that influence the rating are payment history, quantity of newly opened accounts, length of credit history, ratio of account balance to credit limits, amount of credit inquiries in the past year, and the average age of accounts.

In addition to the FICO score, each lender also adds their own criteria for their credit products and makes their own decisions on what number they consider being a healthy rating versus a risky rating.

A credit rating is basically a barometer to the lender, helping them to predict the likelihood that a consumer will default or have unreliable payments. For example, according to historical data, 83 percent of the people with a score below 500 will fall into serious credit trouble. On the other end, only 2 percent of the people with credit scores between 750 and 799 will find themselves in a serious credit dilemma. Most institutions consider a score over 750 to be an excellent rating.

It is wise for consumers to monitor their own FICO score and credit report. FICO offers one free report every two years. To order a report, log in at When applying for the free report, a credit card number will be needed and the consumer will be charged $14.95 if the subscription is not canceled within the trial period. It is difficult to cancel the subscription, as there is not a place online to cancel the trial offer. To cancel, an inquiry needs to be made to customer service and they respond within two business days. Unfortunately, this is the only way to personally obtain a FICO score. Generally, when applying for credit, the lender is not allowed to share the information with the customer, so again the number remains a mystery.

Even though a FICO score is a secretive number that many don't have access to, consumers should find out the health of their credit and ensure accurate credit reporting. A free credit report from can be obtained once every 12 months. Again, these reports supply all of the data to FICO that is used to calculate the FICO score, but the actual score is not provided on the basic credit report.

Unfortunately, there is not a quick fix to repairing a credit score. Repairing credit is a process that takes time and requires consumers to be aware of factors that help and hurt their overall score. Next week, we will discuss strategies to improve the overall health of a credit report, as well as ways to improve the FICO score.

Kara Rozendaal, a financial planner, wife and homeschool mother of three, has lived in Prescott Valley for 16 years. Kara's website,, helps make shopping simple and savings possible.


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