I like to think the following is not only good advice for those about to get into points and miles but also solid, sound personal finance advice that everyone should be aware of.
In the United States, there are 3 major credit bureaus that report an individual’s FICO score. The three credit bureaus are Equifax, Transunion and Experian. Each of them uses its own database of information to determine an individual’s FICO score. The FICO score is the most commonly referred to metric for measuring a person’s credit score and it ranges from 300 to 850. Interestingly enough, the three bureaus generally have slightly different FICO scores for an individual so your credit score will vary based on what credit bureau it is obtained from.
The biggest factors that contribute towards your credit score is your payment history (35%) and current outstanding balances (30%). The FICO website does an excellent job of breaking down the formula to determine your credit score in more detail. In short however, someone who makes on-time payments, has not filed for a bankruptcy or does not have a massive amount of debt outstanding in relation to their total credit available (the credit utilization ratio), will generally have a high credit score.
While the FICO score ranges from 300 to 850, it is foolhardy to try and obtain a perfect credit score of 850. While it is basically unattainable to begin with, there is absolutely no need for a credit score that high. The range of excellent credit is generally regarded to be from 720 to 850. If you fall within that range, then it makes no difference if your credit score is 750 or 830 as you would qualify for the best interest rate on a loan.
Did you know that by federal law every American is entitled to a copy of their credit report from each of the 3 credit bureaus listed above? Every 12 months, you can obtain your credit report from www.annualcreditreport.com, which is run by the federal government. These reports will show your complete credit history and show your current balances as the credit bureaus know them. Please do note though, there is a lag of information so if you recently paid off a credit card or loan, it might not yet be reflected on your report.
The tieback of this to points and miles is that I strongly recommend an individual obtain copies of their credit reports before applying for a series of credit cards. You will want to get a sense of what your credit report entails and to check for any misstatements. On my credit report, I noticed a Discover credit card which was wrong as I have never had any type of Discover card. While it was slightly annoying to call them and have them investigate it, they did remove that account from my credit report after their investigation a few days later. You could easily imagine there might be wrong information on your credit report which could weigh down your credit score considerably. Don’t let that be you!
The most common complaint I’ve heard about these reports is they do not include your credit score and that’s absolutely correct. The law states only the report, not the score, must be made available to consumers once a year. The credit bureaus will happily sell you your credit score for a nice fee but stay tuned for the next post in Points & Miles 101, as I talk about a few tools that will show you your credit score for free!