Let's face it - we live and participate in a society which makes judgments about us based on our creditworthiness and by that I'm referring specifically to the FICO score (developed by the Fair Isaac Corporation), the most widely used scoring model which ranks consumers by how likely they are to repay debt. The FICO score (ranging from 300-850) is used to assess risk in numerous capacities, such as when we are looking to borrow money, get insurance, apply for a job, and so on.
Credit Image: Jeffrey Beall on Flickr
Clearly our credit score can have a great impact on our lives (in a financial sense) therefore it is essential that we actively manage it to make sure that it is as high as possible. The good news is that each one of us has the power to positively impact our respective credit score. Once we have a better grasp on the factors which comprise our credit score, we can be better equipped to take the necessary steps to improve it.
- Pay bills on time - The single biggest component of your score (35%) and the most important thing you can do, period. Invest the time to get organized and make sure you know the payment due dates for each of your bills, especially credit cards. Develop a system that works for you and check in with it often so that you're always ahead of the curve when it comes to upcoming payment deadlines.
- Control your balances - This is also known as your utilization rate and comprises 30% of your score. The lower your utilization rate, the better off your score will be. The rule of thumb is to try and keep your balances below 25% of your available credit.
- Length of credit history - This component makes up roughly 15% of your score. It may seem counter-intuitive to keep open old accounts which are still open yet idle but they can actually help your score. The older accounts show that you're a stable and seasoned consumer who knows how to manage debt and keep it for the long-term.
- Keep new credit requests to a minimum - This component accounts for 10% of your score. Each time you apply for new credit (insurance, loan, credit card, etc.), a copy of your credit score is requested or "pulled" from the credit reporting agencies. This is known as a "hard pull" and each inquiry brings your credit score down by a few points. Usually hard pulls require you to give your permission for access to your credit so anytime you fill out a form on paper or online, expect a hard pull. By contrast, a soft pull refers to instances when you access your own credit file/score and these DO NOT impact your score. Other examples of soft pulls are those done by potential employers, apartments, and pre-approved offers from banks, credit card companies, etc.
- Keep different types of installment & revolving debt - The type of credit used makes up about 10% of your score. Generally revolving credit (such as credit cards) carries more weight than how you handle installment debt (car loans and mortgages).
I firmly believe that knowledge is power so now that you have the knowledge as far as those things which impact your credit score, you can prepare a plan of action to maximize it.
A few more tips to help you go forth in the most efficient manner possible:
- You can access a free copy of your credit report from each of the three main credit reporting agencies (Experian, Equifax, TransUnion) once every 12 months via ANNUALCREDITREPORT.COM - this is the only resource authorized for the free credit report by law and it is yours to use. There are numerous impostor sites out there each with some permutation of the word free, credit report, etc. but don't be fooled as they will charge you for a resource to which you're legally entitled at no charge.
- Even though you can access your credit report for free, you will likely have to pay for your score. There are numerous resources available which allow you to get all three scores at once, usually referred to as "3-in-1 credit report and score".
- A good rule of thumb is to use the free credit report once in the allotted 12 month period just to make sure that everything on your credit report is accurate both from the perspective of any mistakes which may have been made as well as for the purpose of making sure you have not been a victim of identity theft. Then about 6 months later go ahead and pay for the 3-in-1 report and score. The benefit of doing this is for you to be able to compare the information on your credit report from that which appeared 6 months earlier with the added benefit of seeing your score across each of the 3 credit reporting agencies.
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