Manage Your Credit Score
| Right or wrong, your credit score is part of so many things in your financial life: buying a home, purchasing a new car, buying auto or homeowner’s insurance. Your credit score not only is used to determine whether you can obtain credit but also the interest rate you will pay for the credit. Your credit can be viewed by prospective employers when you are looking for a new job and it can effect whether you get the new job. We have become such a credit dependent society. If you have read any of Dave Ramsey’s books you may have heard his story about credit. Because Dave hasn’t used credit or loans for quite a few years now he no longer has a “credit score.” If he wanted to rent an apartment he probably could not do it yet if he wanted to he could purchase the entire apartment complex with cash. How wrong! Hopefully, with the current economic situation, we will learn to become more of a thrift and saving society, become less dependent on credit and credit scores and the financial industry will come up with a different indicator to use. In the meantime we are still stuck with and tied to our credit scores. There are three main credit reporting agencies – Experian, Trans Union and Equifax. They collect data on consumers and their borrowing history and share the information with lenders. Fair Isaac is another company that has a method of interpreting the data that then becomes the credit score. Lenders then use this score to quickly make decisions on who can and cannot receive loans/credit. Credit scores range from 350 to 850 with the low 600s usually the cut-off for “good” credit. Lenders set numerical guidelines based on credit scores which they then use to determine who will receive credit and at what interest rate. So what factors go in to making up your credit score? Thirty-five percent of the score is based on your payment history – have you paid on time and in full? Each additional month you fall behind lowers your score even further. Thirty percent of the score is determined from the total outstanding amount you owe in relation to your income. Each additional line of credit, from any source, can be viewed as a potential barrier to your ability to pay your bills on time. As a general rule, experts suggests using no more than 50% of your total available credit. So if you have $30,000 available, don’t use more than $15,000. Closing credit cards will not boost your score as you will have less “available” credit so your percent credit used will rise when you close accounts. Another factor that goes into the calculation is the amount of time you have had available credit, especially revolving credit like credit cards or home equity loans. If you have a long credit history it will result in a better score than if the accounts are new. Anything less than a year old is usually considered “new.” The type of credit also matters. It is better to have a mix of different types (mortgage, home equity, student loans, credit cards) than to just have credit card debt. A final, but significant, factor in determining the credit score is the number of inquiries or times that potential lenders have reviewed the credit score. Credit inquiries received within a 14-day period count as a single inquiry. So if you are looking for a new loan or credit try to complete all requests within the 14-day period. Remember that shopping for credit numerous times throughout the year can raise a red flag. When lenders request a copy of your credit report as part of the loan-application process it is considered a hard inquiry. These hard inquiries stays on your report for two years and affect your FICO score for a year. The impact of one hard inquiry is generally minimal because inquiries make up 10% of your score. The effect is magnified, however, depending on your overall profile and the total number of inquiries made. These inquiries do not include unsolicited, pre-approved credit card offers. A soft inquiry occurs when you or existing creditors check your report. There are steps you can take to help boost your credit score.
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Personal Finance and Wellness
| This site is for informational purposes only. Lillian is not a financial advisor, and nothing on this site should be construed as financial advice. www.debtandmoneyinfo.com - Personal Finance and Wellness |