Thinking about something new in 2013? A new car, perhaps? Or, maybe a big screen TV or even a change of jobs?
Before you proceed with your plans, take a few minutes to consider the one thing that could prevent all of that from happening: your credit score.
If your credit history is the story of your financial life, then think of your credit score as the grade you earned. It’s the snapshot that tells others how much of a risk you are to do business with. It can have an effect on your life in many ways, including:
- Taking out a loan or applying for a credit card
- Renting or buying a home
- Applying for a job
- Obtaining insurance
- Purchasing cars, large appliances, or even cell phones
What’s in your score?
Who knew one number could have such an impact, right? Given everything that’s happened since the financial meltdown of 2008, and the tightening of credit rules, knowing what your score is, and what goes into it, is more important than ever.
It starts with your credit history, which is the report that lists all lines of credit you have had and your history of payments. Using that information, a score, most commonly referred to as a FICO score, is developed that states your creditworthiness as a 3-digit number between 300 and 850.
The higher score, the better risk you are. A person is generally considered a good risk if their score is above 700.
Your score is based on a formula that includes:
- Payment history. On-time payments on all your accounts help you get a higher score. The score is lowered for late payments, delinquent or over limit accounts, bankruptcies, and liens. This is about 35% of your score
- Total amount you owe. This includes the ratio of what you owe to the amount of your available credit. Maxing out your credit lines can lower your score, but so can having too much available credit. About 30% of your score
- Length of credit history. This shows how long you’ve been using credit and how you’ve managed your finances in the past. About 15% of your score
- New credit accounts and inquiries. This includes accounts you’ve opened recently, and recent inquiries from companies you’ve applied to for credit. Applying for a lot of credit can lower your score. About 10% of your score
- Types of credit in use. Your credit accounts, including credit cards, installment loans, mortgages, and other credit. About 10% of your score
Keeping a good score
Once you know what makes up your score, you can work on maintaining or improving it.
The first place to start is the credit reports that your score is based on. Most experts suggest reviewing your credit report once a year. A free report is available once a year from each of the three major credit bureaus by visiting http://www.annualcreditreport.com or by calling 1.877.322.8228.
To improve your score, and maintain it at a high level, consider the following steps:
- Pay your bills on time all the time. Since your payment history makes up the largest part of your score, the best way to improve or maintain your score it to make payments on time
- Pay down your balances. This might be the fastest way to improve your score, since this lowers the amount of credit you’re using. Try to use less than 50% of the credit available to you
- Avoid opening a lot of new accounts at once. And if you decide to close some credit accounts, close the newer accounts first. Be careful to not close more accounts than necessary, which lowers your ratio of debt to available credit
- Rotate and use all of your cards. A dormant credit account will not help your score.
There are many financial tools at your disposal these days to help you pay your bills on time and manage your credit worthiness. Many are available free from community banks such as First National Bank-Fox Valley, which provide an array of online and mobile banking tools that make it easy to manage your money and automate your payments so they’re always on time.