With the emergence of tighter credit over the last several years people are more concerned about their credit score than ever before. They know their credit score plays an important role in whether or not they can establish new credit, what kind of interest rates they'll face, and whether or not they'll be able to finance a home addition or send their kids to college. Unfortunately, finding out your credit score is not as easy as it sounds.
Many people confuse credit score with credit reports, assuming that they are one in the same. They are not. Your credit report is simply a listing of your past and current credit accounts, how much you owe, and what your payment history is. Your credit score is a number that is derived by plugging all the information from your report into a mathematical formula. The point of the credit score is to give lenders a good idea of how likely you are to default on your credit within 90 days of the date a report is requested.
Credit Reports Are Free, Credit Scores Are Not
Thanks to the Fair and Accurate Credit Transactions Act of 2003 (FACTA) consumers are entitled to one free credit report annually from the nation's top three credit reporting agencies. Consumers can order a single report from each of the three once every 12 months. They can order reports from all three at the same time, or make individual requests from each one as needed. By making these reports free, the federal government hopes consumers will take a more proactive approach in starting their own credit.
The three participating companies are:
If you prefer to have access to your credit report on a more frequent basis, there are companies that allow you to sign up for their service which gives you unlimited access. These services generally charge a modest fee which may or may not be worth it to you. Keep in mind that despite the myth, there is no adverse affect on your credit score even if you check your credit report multiple times during the year. It is negatively affected if lenders do it, but not if you're the one making the inquiries.
With all that said your credit score is not contained on your credit report. If you want a copy of your credit score you will almost always have to pay for it. A typical fee charged by one of the big three credit reporting agencies is about $20. When you pay the fee the agency will run your information through its formula and return a number to you. Most often that number is based on the FICO system which scores credit somewhere between 300 and 850.
Free Credit Score Calculators
It's possible to get a ballpark figure of your credit card score for free by using one of the many online calculators that are available. These calculators ask you a series of questions about how many current accounts you have open, what your balances are, and whether or not you are consistently late with payments. Keep in mind that such calculators can give you an approximation, but they are never perfect. Even slight changes in your credit report from week to week can affect your score. For the purposes of this article, I used several of these calculators and discovered most of them were within 15 to 20 points of the real FICO score provided by Equifax.
Credit Card Companies Are another Source
Some credit card companies offer credit monitoring services to their best customers. Discover is but one example. This service entails monitoring your credit on a monthly basis and informing you of any changes in your score or your credit report itself. These services are not offered for free, but credit card companies don't charge astronomical fees for it either. Usually you can get the service for under $10 per month. One of the nice benefits is that it gives you easy access to your credit score and report any time you need it.
The only thing you need to watch out for when purchasing the service from your credit card company is the possibility of hidden fees. Should you decide to sign up you need to read the paperwork carefully so that you know exactly what you're getting. For example, some credit card companies will provide only a limited number of free reports annually, charging you various fees after that. Just make sure you read all of the documentation thoroughly and understand what it says.
What Your Credit Score Means
A credit score is nothing more than a mathematical representation that sets about to predict how trustworthy you are as a credit risk. Using the FICO system as an example, the lower the credit score the more risky an individual is considered by lenders. The opposite is also true. Lenders categorize borrowers based on various ranges of scores between the FICO system's 300 and 850. The range you fall into will determine how favorable your future credit offerings will be.
Although different types of loans consider scores differently, there are some general guidelines we can look at. As a general rule, a FICO score above 700 is considered excellent and will virtually guarantee you the lowest interest rates and the best terms. You also probably won't have any trouble securing credit with a score that high. From 699 down to 500 your credit is still considered to be fair. You probably also won't have trouble securing most kinds of credit with this score, as long as the dollar amounts are not excessive. You'll pay higher interest and might be required to make higher down payments.
A score below 500 is considered sub-prime and very risky. Between 500 and 400 you probably need significant collateral or co-signers in order to obtain most kinds of credit. You will also pay among the highest interest rates in the industry and will have the most restrictive terms. People with credit scores between 400 and 500 typically receive very little grace from their lenders if they have trouble making their payments. If your score is below 400, you can probably forget about getting any sort of credit at all.