When it comes to fiscal fitness, your credit score is the key piece of personal financial information that impacts whether or not you can get a loan, credit card, home or job.
Naturally, it makes sense to pay close attention to your score.
The national average credit score is 723, but individual scores can range from 300 to 850, with a higher number indicating a lower credit risk. A score in the 700s or higher is excellent. Around 650 is a midrange score, and anything lower than 600 falls in the "needs improvement" category.
As the calendar turns, it's wise to get a copy of your credit report to start the new year.
According to the Public Interest Research Group, one in four credit reports has errors that are serious enough to disqualify consumers from opening a bank account, purchasing a home or even getting a job! Resolving any mistakes and improving your credit score should be priority resolutions.
The easiest way to access a free credit report is to log on to www.annualcreditreport.com. Additionally, you can obtain a copy of your report by calling the toll-free numbers of the respective big three credit companies -- Equifax, Experian and TransUnion. They will provide your credit report free of charge, but you will have to pay a nominal fee should you want to know your actual credit score.
Personal information, such as your name, current and previous addresses, employers, date of birth and social security number are listed on your credit report. There is another section detailing your credit history, which includes the dates you opened your accounts, credit limits, balances and your monthly payment history.
Positive information that makes you look responsible remains on your report indefinitely, but negative information, including closed accounts, is removed seven years after the last activity. Other information that stays indefinitely includes credit transactions of $150,000 or more, a job with a salary over $75,000, and an application for credit or life insurance valued at more than $150,000.
Public records also appear on the report for a period of time. For example, bankruptcies remain for 10 years, unpaid tax liens for up to 15 years and delinquent child support payments for up to seven years. Inquiries, which occur every time a party requests a copy of your credit report, also show up on the report.
Finally, a statement of dispute might be included if you challenge part of your credit report. It will remain until the problem is resolved (usually within 30 days).
Before credit scores existed, lenders had to determine whether to approve loans on a case-by-case basis, a time-consuming process filled with potential bias and room for error. During the 1980s, Fair, Isaac and Company created a standardized approach to calculating credit scores that removed bias and saved time. This approach produces FICO scores which are now used by over 70 percent of lenders.
Your credit score is based on factors such as your payment history; the number of late payments you have made; the type, number and age of accounts you have; your total amount of debt; recent credit inquiries; the length of your credit history; and public records. Since most of these factors are variable, your credit score will fluctuate over time.