In the Money: Credit Scores and Reports
You have to know your FICO Score. Period!
Just about every financial move you will make for the rest of your existence will somehow involve your FICO score. Not knowing how your score is calculated, used and how you can maintain or improve it will most likely limit your financial wealth. With that being said, let’s change that…
FICO 101:
A FICO score is a three-digit number that basically determines the interest rate you will pay on your credit cards, loans (car, mortgage and etc.) and whether or not you will be able to get a job or have your application for a rental apartment approved.
So, what does FICO mean?
It stands for Fair Issac Corporation and is the firm that created the formula used to calculate your credit score. In the business world, FICO scores are a great tool to determine how good you will be at handing a new loan or whether you are a financially responsible person to rent an apartment to. In the workforce, FICO scores are a great tool to determine your character and fitness.
High Scores = Great deals :-)
Low Scores: = Paying higher interest rates :-(
Determiners:
Your FICO score is based on your spending or bill-paying habits and your overall debt load. From those you do business with to phone companies and credit card companies, your financial activity is being reported to one of three credit bureaus (Equifax, Transunion and Experian). These three credit bureaus know how much you have spent, what you owe and your bill payment history (on-time or late).
Checking your credit report:
Did you know you can check your credit report for free annually by going to annualcreditreport.com? This is made possible by the Fair Credit Reporting Act (FCRA) which requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. If you have errors on your credit report, you can easily file a dispute with the credit bureau to get that corrected.
4 Tips on how to improve your score:
Pay on time : all that is required is that you pay the minimum balance on time. That shows creditors that you are financially responsible. Make sure you pay at least 5 days before your due date. You can give yourself a reminder by using the calendar feature in your cell-phone. Who doesn’t have a cell-phone these days? Well, if you don’t you can always mark the date using a paper calendar.
Manage your debt-to-credit ratio: the lower the ratio the better! One way to get the ratio down is by paying your bills down. I am the queen of obvious right? But, If you do not have the extra cash to pay towards your balance and have the resolve to behave responsibly you can ask your credit card companies for a credit limit increase. Boom, you just lowered you debt-to-credit ratio! However, the obvious risk in doing this is that you will be tempted to spend more so make sure you police yourself.
Review and protect your credit history: your credit history plays a role in your credit score, the longer your history the more data FICO has on your money-management skills. So a misstep here would be to cancel an old credit card because it has the potential of shortening your credit history. Additionally, review your credit report for inaccurate information and file disputes, if necessary.
Create the right mix: put some variety on your credit report. Vary your credit accounts with credit cards, retail cards and/or installment loans. However, do not apply for too much credit all at once as this can make you seem financially unstable to creditors.
To recap:
Check your credit reports at least once a year to make sure there are no mistakes that could make your FICO score lower. Always pay your bills on time, even if it means JUST paying the minimum (if you can afford to pay more please do so) to keep your FICO score strong or to improve it. The best course of action to improve your score may not be canceling a credit card as this can have the potential to drop it. You can always check a credit score simulator to see what the potential impacts canceling a card, applying for new credit and etc. will do to your score.
Jen’s Finance Jewel:
Pass down your FICO score to your children. One of the best ways to educate your children on wise financial management is to send them off with an excellent score and why that is important to have. Add your child to your credit card account as an authorized user and they will insert your credit history profile. Guess what? You don’t even need to tell them they have a credit card (hehehe).
Disclaimer: this is intended for informational purposes only and should not be construed as personalized investment, legal or financial advice. Please consult your investment, legal and financial professional(s) regarding your unique situation.