Keys to Financial Success
Understanding Your Credit Score
Using Credit Wisely is Key to Financial Literacy
If you follow KΘE on Facebook, you joined us for Finance Friday during National Financial Literacy Month in April. As part of our commitment to Economic Empowerment, we’ve created the SmartMoney column, an exclusive feature of The Ladder. In every issue, we’ll share timely financial tips to help you earn (and keep) more of your income.
Your credit rating is important. It can affect whether you are approved for your dream apartment or home, personal and business credit, and even employment opportunities. The key to taking control of your credit – and becoming an empowered user of credit and debt – is knowledge of how the credit system works. Let’s start from the top.
What Is Your Credit History?
When you apply and are approved for a loan or other debt instrument (credit cards, student loans, etc.), a credit usage file is generated with each of the three major credit bureaus: Experian, Equifax and TransUnion. Depending on your use of the credit issued to you, these reports are a history of your creditworthiness. Companies use these reports, in combination with your credit scores (more on these in a moment) to decide whether or not to extend you additional credit, and the interest rate for which you qualify.
Your credit reports include lots of vital information about you. Here are just a few of the things listed on your reports:
– Your legal name, and any other names you’re identified by (married/maiden, etc)
– Past and current addresses
– Employment information
– How long you’ve had credit
– What kinds of credit you have (revolving, installment, etc.)
– How much money you owe on outstanding obligations
– Your credit repayment history
– Recent inquires (when you last applied for new credit)
All of this information helps potential lenders make an informed decision about your ability to repay your obligation if they decide to do business with you. Much of this information is used to calculate your credit scores (yes, there’s more than one), and will have a direct effect on your financial picture over the long-term.
What is a “Credit Score”?
Your credit score is a three-digit number calculated to determine your risk to a business if they offer to extend credit to you. The most commonly known credit score is the FICO, so named because it was designed by the Fair Isaac Corporation. Your FICO score, though the most popular of the credit scores, isn’t the only one. In fact, FICO generates several different scores for you that are used by different industries. There’s a mortgage FICO, and auto loan related version and several others.
How Your Credit Score is Calculated
According to FICO, there are five major areas taken into consideration when calculating your credit score:
– Your payment history on active and past accounts
– The amount you owe on all accounts
– The length of your credit history (How long hacve you had credit?)
– Your “credit mix” (the types of credit you currently have/have been approved for in the past)
– Your new credit inquiries (how many credit applications have you made recently)
Though some of these factors are more heavily weighted than others, the most effective way to ensure a positive credit rating is to treat them with equal importance, and actively work to control the areas you can –
How To Take Control of Your Credit Today
Make your credit payments on time. If you find yourself in a situation where that isn’t possible, contact the company immediately to make payment arrangements.
Try to keep your use of available credit under 30% (good) and strive for under 10% (optimal). The more credit you have available that isn’t being used, the more confidence lenders have in your fiscal responsibility.
Review your reports and correct any errors. Each bureau has a dispute process, and you can use it to help you clean up outdated information. If you’re a US citizen, you are entitled to one free copy of your credit report from each bureau each year. Visit annualcreditreport.com to receive your copy.*
Have an old account in good standing? Don’t close it! The longer your credit history, the better – especially if it’s positive. Even if you’re no longer using an old department store credit card, it an bolster your score just by being a part of your long-term history. Don’t close that account.
No matter where you are in your credit journey, you can become empowered and take control of your financial future. Use the tips above to get started, and subscribe to The Ladder so you never miss a future edition of SmartMoney.
*NOTE: AnnualCreditReport.com is a national website sponsored by the Federal Trade Commission (FTC). There is never any cost or “free trial” to access your credit reports through this website. If you are asked to complete a free trial or submit credit card information, do NOT move forward. Contact the FTC to report this, and any phishing attempts related to consumer credit.
Ilena is an entrepreneur and business coach. Her passion is helping others create bigger, better & bolder wins in business and in life. A former member of the Bank of America team, she now serves as Creative Director of MAVEN Studio.
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- Your credit history and score will have long-term effects on your financial success.
- People with good credit have access to better rates on everything from car insurance to mortgages.
- The best time to start building or improving your credit is right now.
- The three major credit reporting bureaus are Experian, Equifax and TransUnion.
- Your credit reports include your name, birthdate, SSN, addresses, credit account history and even employment details.
- There are five factors used to calculate your FICO score, the most well-known consumer credit score.
- One key to credit success is consistent, on-time payment of credit obligations.
- If you have an old account on your reports that’s in good standing, don’t close it!
- Be sure to check all three report for errors at least once per year.
- Request your annual free credit reports at http://annualcreditreport.com.