Thursday, 7 May 2015

Your credit score is as important as your word.

It determines whether you can finance a car, obtain a mortgage and get a credit card. It even could determine whether you'll be able to rent an apartment or get hired for a job.

And if you do qualify for a loan, your score determines the interest rate you will pay. Insurance companies, cable companies and even utility providers also use credit scores to calculate how much to charge customers for service and whether to require a deposit to open an account.

Because almost every financial action you take is influenced by your credit score--and because it's not uncommon for credit report errors to drag down your score — it's crucial to be aware of your score and do your best to keep it as high as possible.

Finding your score

Credit scores range from 500 to 850. While there aren't strict rules about what constitutes a bad score, in general, a low score is considered 699 or below.

You can check your credit once per year without hurting your score. The easiest way to obtain your credit report is by visiting AnnualCreditReport.com, a government-run that site will provide you with a no-cost credit report. Other for-profit sites may ask you to subscribe or charge a fee to check your score. You can also call or email the three credit bureaus directly:

Understanding your score

In most cases, the credit score included on your report will be your FICO score, named for the company that developed it in 1989. Each of the credit bureaus may include different information in your credit report, so your FICO score can vary depending on which credit bureau provides the score. The exact formula used to determine a FICO score is protected, but FICO discloses some of the basic categories that affect a person's score:

  • Payment history accounts for 35 percent of your score. Late payments on bills will cause a score to drop, and bills paid on time will improve a score.
  • Amounts owed account for 30 percent of a FICO score; for example, if you owe a high percentage of your available credit on a credit card, you may appear to be overextended and at risk of late payment or nonpayment. But if you have a history of small balances and not missing payments, that will improve your score.
  • Length of credit history represents 15 percent of your score, so if you're new to using credit, just give it some time.
  • Types of credit used also represents 15 percent--and it can be helpful to have a mix of mortgage, credit cards, and other lines of credit.
  • Number of new credit accounts opened in a short period of time accounts for 10 percent of your score.

Improving your score

If you want to build a higher credit score, consider the percentages attached to each category mentioned in the FICO score. The most important items in your report are delinquencies and charge-offs, your percentage of revolving credit that is open to buy, and recent credit inquiries. If you've let a bill go unpaid, especially within the past 12 months, that can be devastating to your credit score.

Because credit scores are constantly changing based on consumer behaviors, you can always improve your score by changing the way you use credit. Here are some of the quickest ways to lift your score:

  • Pay bills on time and in full.
  • If you owe more than 35 percent of your available credit on credit cards, work to pay the totals down.
  • Open an additional credit card and use it sparingly, paying off the balance every month. But don't cancel existing cards that you are not using, as doing so can increase your ratio of used credit to available credit and suggest that you are abusing revolving credit.
  • Avoid applying for unnecessary credit. While adding some new credit and paying off the balance monthly can help you build credit, don't go overboard. If you're shopping and a clerk asks you to open a credit card or sign to have your credit checked before financing a high-end purchase, think twice. Lots of inquiries into your credit can negatively affect your score.

Correcting credit errors

It's fairly common to find an error on a credit report, so don't assume the credit bureaus always get it right. If you think you see an error on your report, call the consumer credit bureau that provided the report and state your case.

Don't be satisfied with the option to include an "explanation" on your credit report, because the explanation will not fix your score. Instead, it's your responsibility to get all the facts in writing, send the documentation to the credit bureaus, and follow up to make sure the error is corrected.

Even if the error only appears on one report, send all the documentation to all three credit bureaus to make sure the error is removed from your credit history. And keep following up until it's gone. Make a habit of checking your credit once a year. Just like an annual doctor visit, an annual checkup on your credit report can help you keep it healthy.

 

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