Control Your Credit Score
What is your credit score?
A credit score is a three-digit figure calculated from your credit history utilizing software called FICO (Fair Issac Corporation). Despite what many think, the system is fair as the name implies; but you must understand how it works to use it to your advantage.
Why is it so important?
Lenders use your credit score to determine your credit risk or whether or not you will repay the money they lend you. A higher credit score means that you are a lower credit risk or better customer. A high score also qualifies you for a better interest rate which can translate to thousands of dollars in savings. So, it is in your best interest to monitor your credit score.
How is my credit score calculated?
FICO uses five factors to create your credit score: payment history, amount owed, credit history duration, newly opened credit accounts, and types of credit used. Each factor is weighed differently depending on your individual circumstances.
Here are 7 tips to help you better understand the FICO scoring system and improve your score.- The first step in establishing good credit is to open a savings and checking account. This account will enable you to display your money managing habits. Your savings and checking account can also pave the way for your first bank-issued credit card.
- It is never too late to improve your credit score. In fact, the lower your credit score, the more you can raise your score. If you have missed payments in the past, then your best plan of action is to work on your payment future. If possible, pay down the balances on your credit cards. This will very quickly improve your score. At the very least, make the minimum payments.
- If you have experienced a hardship of any kind, do not be afraid to call your creditor before your account gets sent to a debt collector. Tell them why you are having trouble making ends meet, and work out a modified payment plan that makes your payments manageable. You will be surprised by how reasonable the creditors, just remember they are not out to get you. The creditors just want their money usually with reasonable terms.
- If you have a credit card with a high interest rate that you cannot pay down, take advantage of balance transfer offers, but beware of the fine print which is usually the balance transfer fee. Liberty Bank's credit card has no balance transfer fees and a low rate. Never use all of your available credit. Spreading out your charges out between a couple of cards will help you stay below the available credit limit.
- Closing accounts does not improve your score necessarily. If you close an account, then you change the utilization ratio of your accounts. For example, spending $1,000 of a total available $2,000 limit or 50% compared to spending $1,000 of an available $1,000 or 100%. You should keep your ratio at 20% to 30%. You do want to max out your accounts.
- Be selective in getting new accounts because the issuance of new credit will negatively affect your score. Keep the oldest account open even if you do not use it often because it shows more credit history. Ideally, you only want three major credit cards, and store specific credit cards do hurt your score. Credit inquiries negatively affect your score as well.
- Check your credit report every year for errors. Review your credit report with all three credit reporting agencies Experian, Equifax, and TransUnion, lenders are not required to report to all three agencies. These agencies are available by phone or the web to dispute items on your credit report and also to make 100 word notes on your credit report.
