Does Your Credit Score Need a Makeover?
If you’ve ever bought anything on credit, borrowed money from a bank or credit union, or taken out an auto loan or school loan, you have a credit report with your name on it at the three major credit reporting bureaus – Equifax, TransUnion and Experian. Along with your credit report, you also have a ‘credit score’ that gives potential creditors an idea of how risky it might be to extend credit to you. The most popular credit scoring entity is the Fair Isaac Corporation. This is where the name – FICO Score – came from.
Your FICO Score is a three-digit number between 300 and 850. A FICO Score is simply a snapshot of your financial standing at a point in time. Your score can go up or down depending on activity within your credit report. Your FICO Score can determine whether you get the loan or credit card you applied for, or what your interest rate will be on your mortgage or auto loan. Even though there are various ways to access your credit reports at no charge, you will usually have to pay a fee to get your FICO Score. If you are trying to buy a house or make any other large purchase on credit, it would help you to know your credit score before you apply.
Who might use your credit score to make a decision about you? A lender, utility company, cell phone company, insurance carrier, employer or potential employer, military if you need a security clearance, property rental agencies. A good credit score can help you impress lenders that you are not high risk and you’ll be able to qualify for credit more quickly.
The FICO Score is determined by a formula weighting the following:
35% Your payment history
30% The amounts you still showing owing
15% Length of your credit history
10% How much new credit you’ve recently received
10% Types of credit you’ve used
Just to give you an idea of a “good” FICO score: With 720 or higher you’d be able to qualify for a home mortgage with the lowest interest rates. With 620 or higher, you may be able to qualify for an FHA loan or other lender with higher interest rates. With a FICO score lower than 620, you probably wouldn’t qualify for a home mortgage in today’s market. Your credit score, of course, would be considered along with income, length of employment, etc.
The first step to improving your credit score is finding out what it is. But after you know your score, here are actions you can take to improve it:
1. Pay your bills on time. If you’ve been late, get current and stay current. Late payments hurt your credit.
2. Seriously pay down debt. On credit cards, try to get the balance owed below 30% of the amount of your credit allowed on that card.
3. Even if you pay off credit cards, keep the account open so it can build your longterm credit.
4. Don’t apply for too much new credit all at once. Too many inquiries can hurt your credit.
5. Manage your available credit responsibly and your credit score will grow over time.