Everyone knows the importance of the credit score. This FICO number, ranging from 300-850, determines your credit rating and can affect your ability to purchase a house or car, secure a credit card or other loan, or even get a job sometimes. A high score makes it easier for you to be approved for loans and receive favorable rates.
But what if your credit score is low? You may pay higher rates on loans and insurance or not be able to get the credit or loans you need. Even though the negative information can be reported for seven years, you can begin to fix your credit score problems.
A bad credit report doesn't have to track you forever. With some discipline and planning, you can improve your score.
What does the score mean and how is it determined?
Each lender establishes criteria, but generally, here’s how the scores are rated:
- 500-619 - sub-prime
- 620-699 - medium
- 700 and above - good to excellent
Five items are considered in the calculation of your credit score. The most important are at the top:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Types of credit in use
Where does all the personal information come from?
FICO scores are based on your credit reports. Various credit agencies track your credit history which determines your credit-worthiness and then they sell it to interested parties. Credit reports consist of four elements:
- Personal information (compiled from credit applications)
- Credit history (details of your credit relationships)
- Credit report inquiries (entered anytime someone views your record)
- Public records (judgments and liens)
These three agencies track credit scores: Equifax, Experian, and the TransUnion. You're entitled to a free report once every 12 months; the best place to get this is AnnualCreditReport.
What are the best ways to improve a credit score?
- Make your payments part of a personal budget. Set up a dedicated account to make sure that credit card payments are made on time. Your credit score can be lowered by just one late credit card payment. Save as much as you can each month for this purpose – use your budget to find expenses you can cut back on.
- Attack the cards with the highest interest rate first. Try to make extra payments on the card that costs the most regardless of the balance. Pay minimums on the rest. Don't close the paid up or unused accounts.
- Request a lower rate from your credit card issuer. Sometimes this actually does work, so it's worth a try. Think about the interest you pay as lost money.
- Use your credit cards intentionally. Make careful spending decisions and then timely payments. Show that you can borrow money and pay it back responsibly.
- If possible don’t change jobs or locations. Lenders look for people with stable personal lives.
- Avoid collection agencies and judgments against you. Each time you pay off debt, be sure to check that the lien has been released. Make sure that the three reporting agencies have recorded it accurately.
Improving your credit score will take time and discipline on your part. It may even feel like a sacrifice to you. But it's worth it, and it'll save you money eventually. With a higher FICO score, you will improve your chances for credit and loans with lower interest rates. So keep plugging towards the payoff.
What does financial planning have to do with your credit score? Personal financial planning is a tool that will help you successfully improve your credit rating. Contact me to schedule a time to meet. My Resource Library has some good articles on credit and debt that can get you started.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.