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How a credit score is created

December 02, 2013

The question my client asked seemed simple at first: “How is a credit score determined?”

I wanted to simply say it is determined by your consistent attention to paying your bills on time. Luckily though, I decided to research the answer and learned it’s far more than just paying bills on time.

The question my client asked seemed simple at first: “How is a credit score determined?”

I wanted to simply say it is determined by your consistent attention to paying your bills on time. Luckily though, I decided to research the answer and learned it’s far more than just paying bills on time.

The first action I took was to look at my own credit report. For free, you can access one report yearly from each of the three major credit bureaus: Equifax, Experian and TransUnion. Many websites indicate that they will give you a free credit report but trap you into a trial version of their credit monitoring service. Beware!

Annualcreditreport.com is the site which I consistently use and also direct clients to use. Begin by requesting only one of the reports. Once you have entered your name and other pertinent data, there will be a series of questions. They may ask you where you lived in 2006 or if you had ever owned a certain kind of car. This is how they verify your identity. Once that is verified, the site provides a free credit report but not a credit score. What is the difference?

A credit report lists your history. It begins with your current employment and housing status. It then progresses to the report of how you pay your bills — on time or late. Take very close notice of this demographic and geographic data about you. If it is incorrect, you can file a “Request Addition of Information Showing Stability” with this particular credit bureau. If the data lists your most recent job as the one you had a few years back, then file additional information. If the report has your address as your first apartment and you had a mortgage on your home for the last three years, file the stability statement.

What if I want a credit score? On the annualcreditreport.com website, there is a charge for your credit score.

Liz Pulliam Weston, author of Your Credit Score, delineates the five most important factors which affect your credit score (also called your FICO score). Making up about 35 percent of a typical credit score is payment history. How much money you owe on different types of accounts makes up 30 percent. Historical data on your credit, such as the age of your oldest account and the average of all accounts, weighs in at 15 percent of the total score. Making up 10 percent each of the total score are your last application for credit and the types of credit you use.

How exactly a credit bureau determines your credit score contains proprietary formulas, of which the general public has very little knowledge. However, it is possible to work toward credit repair, one credit bureau at a time.

Bottom line: Use credit, pay your bills on timeand check your free credit report yearly from each of the three credit bureaus.

“Business Tips” was written by Peggy Rosser, Rural Business Development Specialist and Certified Business Advisor IV of Angelo State University’s Small Business Development Center. For more information on the topic of this article or the services of the ASU • SBDC, contact her at Peggy.Rosser@angelo.edu.

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    Peggy Hodges Rosser, Business Development Specialist and Rural Business Manager

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