December 5, 2006

Understanding Credit Score - What's in Your Credit Report?

Recently a former employee stopped by to say, "hello". He worked for me while putting himself through college. He graduated in June and got a job teaching. When he asked what I was up to, I mentioned this blog. He stated that he wasn't worried about his credit score because he always paid his bills on time and with his teacher's salary he's never made this much money before, so his credit score should be fine. Right?

I told him, "well, yes and no." Paying your bills on time is critical, because 35% of your credit score is based on your payment history. And paying your bills late is the #1 reason for a lower credit score. "No", because income is not a factor in determining your credit score. He said, "That doesn't make any sense. And if income doesn't count, what does?" I told him that in addition to the 35% for payment history, the other 4 guidelines are:

30% is the amount owed (this is actually the ratio of the amount of money charged on credit cards to the total credit limit)

15% is the length of credit (this is the average time that you have had credit)

10% is the types of credit you have in use (this is the mix of credit you have. i.e. credit cards, mortgage, installment loans, etc.)

10% is the amount of new credit you have.

I then asked him if he had checked his credit report lately? And he replied, "No." I strongly recommended that check his credit report and told him that he could get 1 copy a year free. He could get this by doing one of the following:

calling 1-877-322-8228
going online at www.annualcreditreport.com
writing to:

Annual Credit Report Request Service

PO Box 10528

Atlanta, GA 30348-5281