Understand and Check Your Credit Scores
What's the value of a free credit score?
Credit scores are very much like "adult report cards": They allow banks, mortgage brokers, employers, landlords, utility companies, and others to assess your history of responsibility with lines of credit. Getting your credit scores for free therefore lets you see how your past and present credit issuers judge your behavior.
Whether you can obtain free credit scores or you have to pay for them, finding out what credit firms know about you is a very valuable piece of information. After all, credit issuers use your credit scores to determine what interest rate you'll pay on a line of credit; the higher your score is, the lower your interest rate tends to be.
You should always check your credit scores before making any major purchase, like a car, a home, or even an appliance like a refrigerator or high-definition television that you'll need to buy on credit. If your credit scores are high enough, you may even be able to negotiate a particularly attractive rate — but you can only do that if you already know your credit scores.
How are credit scores determined?
Credit scores are three-digit numbers that are calculated from the information contained in your credit reports. Each of the three major credit bureaus, TransUnion, Experian, and Equifax, uses its own mathematical formula to come up with a score, typically ranging between the low 300s and the mid-800s, that grades your demonstrated history of paying off lines of credit in a dependable, timely manner.
Each bureau uses a confidential weighting system to rate your past performance and thereby predict your likelihood of paying off a credit card, loan, or other credit line in the future. Because the methods the bureaus use to calculate your credit scores aren't freely shared, you don't know exactly what's in the credit-score recipe, but FICO, the originators of the credit score, offers a high-level view of what goes into credit scores:
- 35%: Your payment history. This is your record of on-time, late, and missed payments over the years.
- 30%: The amount you currently owe. This is your total outstanding balance on all open credit accounts.
- 15%: The length of your credit history. This looks at how long you've been using credit in your lifetime.
- 10%: New credit lines. This tallies up the number of accounts you've opened recently.
- 10%: Types of credit you use. This includes credit cards (including retailer and gas cards), loans, utility accounts, and other credit-based accounts opened in your name
The percentages above are estimates; each credit bureau likely changes those percentages when calculating its individual score. That's one reason why your credit score typically varies from bureau to bureau.
Another reason for the variation in credit scores is that each bureau can receive different information about your credit transactions. Credit firms aren't required to report your credit history to each bureau, so if you own a credit card that reports your payments to only one bureau, your credit score at that bureau could be substantially different from the score you receive from the other two bureaus.
That's why it's so important that you check all three of your credit scores. Lenders and other credit issuers are free to check credit scores from any credit bureau they choose when evaluating a loan application, and you never know which credit scores they're going to use when they make a decision on your rquest for a line of credit.
I can get free credit reports at AnnualCreditReport.com. Where can I get free credit scores?
Through the Fair and Accurate Credit Transactions Act (FACT Act) passed by the United States Congress in 2003 to help consumers better understand their individual credit histories, the website AnnualCreditReport.com was created to give every consumer access to a free credit report from each of the three major credit bureaus every twelve months.
However, the FACT Act didn't contain any clauses requiring the three bureaus to provide consumers with free credit scores. While there's been some talk in Congress recently of adding a free credit score provision to the FACT Act, similar to credit reports, there's currently no legislation to that effect.
As a result, if you want to see your credit scores, you essentially have two choices: You can purchase a credit score from each individual credit bureau, or you can accept an offer from a company like FreeScore to access all three of your credit scores for free as part of a trial membership. (As a FreeScore member, you also have free rein to check your credit scores whenever you desire throughout your membership term.)
Can I monitor my credit scores for free?
Currently, there are no services in the United States that allow you to monitor your credit scores for free. FreeScore offers a triple-bureau credit monitoring service for a monthly membership fee, however, and members can also check their credit scores from all three bureaus as often as they choose.
Why Check Your Credit Scores and Reports
Why do you need to monitor your credit and keep an eye on your credit report and credit scores?
Sometimes people become confused as to why they should be checking these reports. In a recent poll, it was revealed that most people check their credit just because they're curious or are applying for a loan; others may have been refused credit.
Watch the video to hear Carrie Coghill, our Director of Consumer Education discuss some important reasons people should check their credit.