Friday, February 1, 2013

Your Credit Score, Demystified

Know what actions may harm your rating
By Vera Gibbons 

Everyone wants your number: Insurance companies, cell-phone providers, utility companies and even landlords routinely solicit that three-digit score to find out if you’re financially responsible. Your FICO credit score can help them make that assessment, says John Ulzheimer, president of consumer education at, a credit-monitoring site.

The FICO score, the number used by most lenders to determine your credit risk, is calculated by three national credit bureaus—Experian, TransUnion and Equifax—that track your credit history. Scores range from 300 to 850, with a median of about 710, according to FICO, the company that developed the credit-scoring system.

If you don’t know your score, go to to request a copy (for a $20 fee). If it’s 760 or higher, relax. Most consumers in that range are generally considered reliable borrowers, says Ken Lin, chief executive of, a free credit-management service. If your number is on the bubble or lower, you’ll need to take action. (And if you see a mistake in your report, like a supposedly missed payment that you actually made on time, contact the credit bureau and say, “I dispute the accuracy of this information, so please correct it,” suggests Ulzheimer. Then follow up with a letter requesting the same.)

Read on to learn about the moves that can wreak havoc on your score (plus a couple that won’t hurt it a bit). Although you can’t easily or quickly boost your credit score, steering clear of these money-related behaviors will ultimately have a positive effect on it.


Repeatedly making late payments.

Payment history accounts for a whopping 35% of your score, so “this is one of the worst things you can do creditwise,” says Lin. The more severe the delinquency, the more damage it can do to your score.

Deduct: Up to 200 points for three or more missed due dates within a year

Maxing out credit cards

Having a high debt-to-credit-utilization ratio--the percentage of available credit you’re using compared with your credit limit--damages your score. Make sure that at least 90% of your credit is freed up at any given time.

Deduct: About 100 points


A hard inquiry

When you apply for a credit card or a loan, the institution asks about your credit to determine your borrowing eligibility; this is called a hard inquiry. It’s fine to open one new credit card, but don’t open several within a few months, says Ulzheimer.

Deduct: 30–40 points for excessive inquiries

Closing old cards

Since your debt-to-credit-utilization ratio is used in calculating your score, be careful about reducing the number of cards you have, as that may lower your overall available credit. Try to keep open those accounts with the largest credit limits—unless there’s a card with an annual fee that you rarely use.

Deduct: About 100 points


A soft inquiry

This is a request made by you or, say, a utility company that is not related to a lending decision, so your score won’t take a hit.

Shopping for an installment loan

If you’re in the market for a mortgage, a home-equity loan or a car loan, FICO realizes that many inquiries will be made. It will lump the requests together, as long as the banks or other lending institutions look up your score within a 45-day period. So don’t drag out the loan search too long or your score may go down, since each request will be viewed as a separate, hard inquiry.

From the August 2011 issue of Real Simple. © 2012 Time Inc. All rights reserved.

Contact Naperville Financial Services Advisors at Platinum Financial, where help is just a phone call away.

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