Your credit score, often called your FICO score, represents to a lender how likely you are to pay your bills on time. It may determine whether you can get a loan, a job, an apartment, or insurance. A low score may prevent you from obtaining the lowest borrowing rates or the best loan terms.
Your credit score is based on information provided by your creditors to the three credit reporting agencies: Equifax, Experian, and TransUnion. Because each agency may have different information about you, your score may differ slightly among the three.
What affects your credit score? Although judgments, liens, and bankruptcies can have a damaging effect on your score, it is the little things that count. Fully 65 percent of your FICO score is based on two key factors: your payment history and the amount of debt you carry versus the amount available to you (i.e., your credit card limits). Also important is your length of credit history, how much new credit you have applied for, and your mix among credit types. For more detailed information, visit www.myfico.com/crediteducation.
TIP #1: GET YOUR SCORE.
Although you can get a free credit report once every 12 months through www.annualcreditreport.com, the report does not include your score. You only get a free score if you have been denied credit or insurance. Many lenders will provide your score upon request, after your application has been approved. If you want to know your score before applying, you can pay a small fee to one of the credit reporting agencies or go to www.myfico.com. Offers for free scores are usually tied to monthly credit monitoring services.
TIP #2: CORRECT YOUR INFORMATION.
It is a good idea to check your credit reports annually to ensure that they are accurate. Correct mistakes immediately, with both the institution and the credit reporting agencies; they have a responsibility to correct errors under the Fair Credit Reporting Act. Be sure to send copies of supporting documentation and keep a record of your request.
TIP #3: UNDERSTAND YOUR RATING.
FICO scores range from 300 to 850, with 850 the best possible score. In 2015, the median credit score in the U.S. was 723. As a general rule, a FICO score above 700 is very good; scores below 600 indicate a high credit risk.
TIP #4: KNOW HOW TO IMPROVE YOUR SCORE.
You can take the following actions to help improve your score:
- Pay bills on time.
- Pay down credit card balances. Reduce the credit card balances you carry to below 35 percent of your available credit limit; 10 percent is ideal.
- Cut up unnecessary cards but don’t close the accounts. Because your utilization rate counts as 30 percent of your FICO score, don’t reduce your available credit by closing old accounts. Instead, train yourself not to carry unnecessary cards or cut them up.
- Remember that the trend is your friend. As your credit “blips” recede into the past, your new habits have more weight.
Don’t be taken in by ads for companies that offer to get you out of debt by negotiating with creditors. You may get a reduction in your credit balance, but not without paying a high price. Moreover, if the company encourages you to walk away from your debt, you will also likely damage your credit score and wind up paying additional taxes.
You don’t need a third party to work out a modified repayment plan. Call the number on the back of your credit card, explain your situation, and ask to restructure your payments.