One of the most common questions I get asked is whether I think someone has a good credit score (quickly followed by how they can improve their credit score). I know a little bit about credit scores and can usually give someone a good idea but whether a score is good will depend on a lot of factors.

First off, when people talk about credit scores, they’re usually talking about the Fair Isaac Corporation’s FICO credit score. There are others out there, one for each of the credit bureaus, the VantageScore, but ultimately the one people care about is still the FICO credit score. The others are given less glamorous names, like FAKO score.

With the score itself, a lot of it will depend on what you’re trying to do, how rates are in the marketplace, and whether your score gets you the rate you need to complete the transaction.

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How much does it really hurt your credit score if you are late on your mortgage? What if you default and are foreclosed upon? Until recently, all we knew was that it was “bad.” Canceling a credit card was “bad.” Missing a payment was really “bad.” Defaulting was one of the worst “bads.” What we didn’t know was how bad it actually was because the FICO credit score equation has always been a black box.

Well it turns out that we might get a little peek into the black box.

Fair Isaac Corporation, creator of the FICO credit score, recently released some data on how your score is affected by certain “adverse actions” – being 30 days late on a mortage payment, a foreclosure, bankruptcy, short sale, etc. They also estimated how long it would take to fully recover from the action. I personally think it’s a little odd because, well, FICO created the score and the equation that calculates it.

Either way, the data is still compelling:
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I’m one of the moderators of the Personal Finance sub-reddit (at Reddit.com), which routinely sees plenty of credit score related questions. This recent one made my blood boil when user wooga told me that his lender advised him to carry a balance to improve his score.

wooga: I was told by the lender that if I paid down to 1/3 of my balance that it would improve my score by 100 points in a few months, more then it would to keep a zero balance(or pay off each month) which is what I normally do. I didn’t believe it. …

I’m glad he didn’t because it’s flat out wrong.

Lenders would like you to believe that your credit score improves when you pay interest but it’s simply not true. Credit cards report your balance when your statement closes. They report it again when the next statement closes. They are snapshots in time with no information about what happens between those two moments. The reports are the same whether you carry a balance or pay off the balance in full, so carrying a balance does not improve your score.

It’s important to remember that the FICO credit score is designed to calculate the likelihood you will default on a loan. Whether or not you carry a balance is not any better an indicator than your balance at statement’s close. If you charge $500, pay off $500, and then charge $500, you are no riskier than someone who charges $500, pays the minimum plus interest, and carries the $500 forward.

Don’t carry a balance if you can avoid it and certainly don’t do it because you think it’ll improve your credit score.

If you thought that graduating meant the end of people grading and assigning you a number, think again. In the real world, it’s not your GPA that matters, but your FICO score. It’s a three digit number that is supposed to give creditors an idea of how credit worthy you are. Technically, it’s a measure of how likely you are to default on your debts.

It’s obvious why credit card companies, mortgage lenders, banks, and the like are interested in your credit score, but did you know that your employer, your landlord, your cell phone company, and your cable company are interested in it too? Anyone who may lend you something, like your cell phone company giving you cell phone minutes before you pay for them, is interested in how likely you are to make good on your financial promises. Your credit score has taken a life of its own, it’s about time you understood the beast.

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For a limited time, American Express is offering a free look at your Experian PLUS credit score and Experian credit report. The Experian PLUS credit score is not the same as your FICO score but there’s no way for you to see your FICO score based on Experian data, so this is about as close as you’ll ever get. Experian PLUS uses a different range too, from 330 to 830, versus the FICO score range of 300 to 850.

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Ever wonder what a good credit score is?

You can check your score at a variety of places that offer free FICO credit scores but how do you really know whether your score is good or bad? Is a 700 good? Or do you need an 800? How’s a 600?

I think it comes down to what you plan on doing with that number.

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When you apply for a loan or a credit card, the lender will run a credit report check on you to determine your credit worthiness. If they decide that you’re too great a risk for a loan or credit card, they’ll send you a letter in the mail letting you know that you’ve been rejected.

On the letter, they’ll list the bureau they pulled your credit report from (Equifax, TransUnion or Experian) as well as the risk factor reason codes for the risks you pose. The risk codes will be listed in the order of importance, so the higher up on the list in your letter, the more significant it is.

Ever curious what all the reason codes are? I was… so I did some digging. Here’s a list of all the reason codes as well as the number for each bureau.

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This week’s Your Take will be a little different, it’s going to be a poll (though you are still welcome to leave comments!).

A few weeks ago I talked about the FICO score credit range. In that post, I referenced a statistic published by FICO that said 58% of all FICO credit scores were above 750. Here’s the chart of score distribution:

I’ve always believed that readers of personal finance blogs are, by definition, savvier about personal finance than the average bloke on the street. Since a personal finance reader is more interested in personal finance, it stands to reason that they would have a better handle on their finances. So, the question I pose to you today will in fact be the first poll in Bargaineering.com history:

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It’s very important that you regularly review your credit history to catch errors and inaccuracies early. Errors can take months to remedy and it’s not something you want to worry about when you are trying to get a mortgage or car loan. So, I recommend that every four months you request a credit report through AnnualCreditReport.com, the only website you should use to get your annual free credit report as mandated by the Fair Credit Reporting Act.

This week, I requested my credit report from Equifax and will take you briefly through the report to explain what the sections are and what to look out for. Each of the three bureaus structures their reports slightly differently, so I’m hoping this guide and walkthrough will help illuminated anything that looks strange.

As with every bureaus, Equifax gives you online access to your report for thirty days. During those thirty days, any changes will not appear on your history, your report is accurate as of the day you requested it. Let’s take a look at my Equifax report.

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One of the biggest misconceptions I hear and read about regarding your credit score is that you need to carry debt to improve your score. Some articles say that you should get a car loan because it’ll boost your credit score. Others will recommend that you leave a little balance on your credit card rather than pay it off in full each month. While all of them are technically correct, those strategies will improve your score, they are financially wrong.

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