It is more than likely that at some point in your life you will need to borrow money – whether it’s to buy a house, a new car, or fund an unexpected emergency.
When you do, lenders will review your credit score to decide whether you have suitable lending risk. While a high credit score will deem you “creditworthy,” a low credit score may result in elevated interest costs or denial of credit.
In light of the recent economic challenges, credit is being reviewed and critiqued in a far more extensive ways than it has in the past. In other words – a good credit score is key to your personal financial management.
We’ve put together some simple points to help you better understand the credit scoring system and how it can impact your future.
What is a credit score?
Your credit score (or FICO) is a number roughly between 300 and 850 that measures your creditworthiness and risk predictability. It is based on an algorithm that uses information taken, in large part, from your credit report. The credit report evaluates many factors such as payment history, active and closed account listings, current balances, available lines of credit, and payment amounts.
What is a “normal” credit score?
The median range for a credit score is between 680 and 740, with the average U.S. consumer coming in at 723. A score above 700 means you’re performing relative to expectations of the credit grantors. If you fall into the lower range it may mean it’s time to focus on improving your relationship with the various financial institutions for which you have credit.
Who determines the credit score?
There are three companies that dominate the credit reporting business: Equifax, Experian and Trans Union. All three agencies use different models for credit scoring, but these are some key factors that play a role:
- Payment track record
- Longevity of your credit
- Whether or not you’re taking on new credit
- Types of credit accounts
How can I get my credit report?
You are entitled by law to get a free copy of your credit report (from each of the three agencies) once every 12 months. Reports will not be provided to you automatically, so it’s up to you to request them. You can do this online at AnnualCreditReport.com.
It’s important to note that AnnualCreditReport.com is the only authorized source for consumers to access their annual credit report online for free. Many other scam sites have appeared over the years that trick people into paying for the report.
When you receive your credit report, review all the information and ensure everything is accurate. You may even want to meet with your banker to help get a better grip on the information in the report.
If you find inconsistencies, immediately take the necessary steps to correct them. It can take a long time to recover from detrimental information on your credit report, so the quicker you can fix it, the better.
What can I do to improve my credit score?
- Make sure you make payments on time.
- Manage your debt levels and make consistent payments to pay them off.
- Monitor your unsecured credit – keeping your balances minimal on your revolving accounts can have a dramatic impact on your score.
- Use credit cards lightly – don’t rack up big balances that you won’t be able to pay off, this tends to be the most abused form of credit do to its ease of access.
- Diversify your portfolio with various types of credit. You’ll get the fastest improvement in your scores if you show you’re responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).
Information and education are key when it comes to good credit. Make it a habit to check your credit report on a regular basis. And when you find inconsistencies, address them immediately. After all – it can have a significant impact on your financial future.