Are you looking to buy a new car, apply for a mortgage or pursue a new career opportunity anytime soon? Then you may also know that your ability to secure a loan, a low interest rate, and even that coveted new career position, is dependent upon a vital piece of financial information – your credit score.
Your credit score (also called FICO score) is a three-digit number between 300 and 850 calculated from a formula that’s designed to gauge your creditworthiness. Put another way, it’s the rating you’ve earned as a consumer/borrower through your spending and borrowing habits. When a lender considers your application for credit, they turn to one (or all) of the three-main credit-reporting agencies for your score, which indicates your reliability as a borrower. These agencies (Equifax Inc., Experian PLC, TransUnion) use your personal data and crunch the numbers differently, so your score will vary slightly at each agency.
Your credit score includes the following information:
Having a higher credit score simply makes good business sense: a higher score equates to lower interest rates, literally saving you thousands of dollars in financing fees over the life of your loan.
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
If you aren’t getting approved for credit cards or loans, or receiving favorable rates for financing, you might need to make improvements to your credit score. While building credit is not a quick fix, once you begin managing your credit responsibly, your score will improve over time. Try following these quick tips to get you started:
Prospective lenders are keenly interested in your ability to meet monthly payment obligations which is why payment history is the biggest credit score ingredient, making up 35% of your score. One late-payment can be damaging - dropping your score by 50 to 100 points. To avoid this from happening, there are actions you can take to keep yourself organized. For example, you can establish automatic monthly payments from your checking account and/or set up email and text alerts to be notified when your bills are coming due. The longer you pay your bills on time, the better your score.
Thirty percent of your total credit score is based on your credit utilization – that is, the percentage of available credit that has been borrowed. Since FICO views borrowers who habitually max out credit cards as people who cannot handle debt responsibility, you should maintain low credit card balances. Keep debt at least 30% below your credit card limit to keep your debt-to-income levels manageable. Use your cards for items you can pay off at the end of the month, and make payments on time. Also, if you pay off a credit card, don’t close the card as this rarely helps your credit score. In fact, closing a card is more likely to hurt your credit score.
If you’ve had trouble getting approved for an unsecured credit card because of poor or unestablished credit, a secured card will help you get back on track. A secured card requires you to make a cash deposit (usually less than $500) that becomes the credit line for that account. Looking for a secured card? Check out WalletHub's recommended cards.
By law, you’re allowed three free credit reports per year from the three credit reporting agencies. Consider spacing them out over the course of the year to keep current tabs of your progress. You can also get a free copy of your credit report from AnnualCreditReport.com and review it for accuracy. Contact the creditor and credit reporting agency to correct any errors.
Fixing credit issues will take three to six months or more, sometimes up to a year. More serious issues like identity theft or bankruptcy can draw the process out to a year or more. Remember, there’s no easy fix to repairing credit so stay diligent and continue to build good habits and you'll eventually be rewarded with a good credit score.
Wondering if your credit is good enough to secure a home mortgage? Our handy credit guide can answer many of your questions.
Not intended as credit counseling, accounting or investment advice. Contact your financial representative or tax preparer for more information. Not all borrowers will qualify; contact us for more information on fees and terms.