Everyone should know how their credit score is made up as it very much affects your financial freedom. The Fair Isaac Co., (FICO score), creator of the score, uses a complex formula to make up an individuals score. Basically, it looks like this:
- 35% comes from your past payment history, so pay your bills on time and don’t miss a payment!
- 30% comes from how much you owe, so keep your outstanding balances below 30% of your available credit…the lower the better.
- 15% comes from your credit history. Having a few cards for a long time is a plus but dormancy is a minus, so charge and payoff with regularity.
- 10% comes from new credit. Don’t open unnecessary cards and keep creditor inquiries to a minimum as multiple inquiries will ding your score.
- 10% comes from your mix of loans. This is usually out of your control. A good mix would consist of a home mortgage(s), an auto loan(s), revolving credit card(s), a student loan, etc.
An individual should look at their own credit score at least annually so that they know where they stand. You need to be on the lookout for any errors or inaccuracies. If you notice an error or omission, you will then be able to act on it before too much time goes by. Once a year you can order a credit report for free from one of the three credit reporting agencies, which are: Equifax, Experian and Transunion. Ideally, you would order one report from one of the agencies every third of the year so that you are being updated three times a year, each time by one of the three different firms. Having a firm grip on your credit score and watching it rise is closely intertwined with your financial freedom. As your score goes up, the interest that you are charged for a loan goes down because the lender feels more confident with your ability to repay the loan. Over time, you will save thousands in interest fees for the various loans that you will take out during your lifetime, so keep that credit score climbing!
Here are some more credit/debt notes to ponder:
- Bankruptcy stays on your credit report for 10 years.
- Tax liens could stay on indefinitely.
- Rule of thumb: keep your debt at 30% or less of your available credit, the lower the better. If you stay below 10%, you will garner the most amount of points in this category.
- If your payment due date is inconvenient, call your creditor/lender as very often they will change it for you.
- If you think you are going to fall behind or miss a payment, call your creditor/lender and talk with them about it as open lines of communication go a long way to keeping your credit from being tainted.
- Avoid damaging your score. One way to do this is by using on-line bill payment programs to help you pay on time each month.
- A common myth is to close old accounts you do not use. This is false as longevity with a creditor is a plus. A better action is to charge and pay off with regularity.
- Avoid applying for in-store finance deals. Instead, use your existing lines and pay off with regularity.
- When you need a loan of any type, try to do all of your “loan shopping” in a 14 day period as all of the inquiries will only count as one inquiry against your score.
- Be very very cautious with credit repair services. Understand what it is that they are going to do for you. In many cases, you can do it yourself.