Start the New Year off Credit Savvy!
One of your top resolutions this year should be to stay on top of your credit score. We are all aware that our credit scores are important in securing our chances of getting approved for loans, insurance and employment. However, too many people don’t check their credit report for months or even years. You are entitled to one free credit report each year from all 3 bureaus, so start 2012 by accessing your credit history by going to www.annualcreditreport.com. Those people that do pull their reports often have no idea how the credit bureau comes up with the 3 numbers that affect our daily lives so much. Let’s dive into it and be an educated consumer.
Our credit scores are made up of 5 components. The chart below from my www.myfico.com shows the breakdown of each component and how much effect it will have on your score.
Payment History is 35% of our score. Most citizens are well aware that paying our bills on time is an important part to maintaining a good credit status. Older bills will not have as much impact on your rating as recent accounts. It is vitally important that all accounts are in a current status. Some bills will impact your credit score worse than others. For instance, missing a mortgage payment will affect your score drastically, while a credit card payment will not do as much damage.
Often time’s people overlook the impact that credit to debt ratio, also known as amounts owed, has on their credit score. Credit to debt ratio sounds complicated, however it is quite simple. This term refers to the balance you have owed on your credit card presently to your credit limit. Let me give you an example. You have a credit limit of $1,000 on your credit card and your balance is $400, therefore your credit to debt ratio is 40%. Credit bureaus like to see a credit to debt ratio for revolving accounts (credit cards, unsecured loans) under 30%. If you are trying to reestablish or build your credit score the lower this ratio the better.
No credit is worse than bad credit! How many people have heard that statement? Probably many of you and it is 100% true. Length of credit history makes up 15% of your score. Having no credit puts you in a high risk category with the bureaus since they don’t know how you will pay your bills. Whereas, someone who has a credit history of 10 years provides an outlook of how they will handle credit in the future. If you have older cards don’t close them as this will maintain your credit history on file. For those citizens who have no credit start to build a history to secure your financial credit status.
When was the last time you went to a store and they offered you a discount to apply for a credit card? The answer is probably very recently. At most places this is a common practice. The question is did you say yes and apply? If you answered no then you are on your way to building good credit.
Nonetheless, if you did agree to apply you are affecting your score. Each time you give someone permission to pull your credit report it is considered a hard inquiry. Hard inquiries will not kill your credit score, yet they do have a temporary negative consequence. Avoid applying for numerous cards in the future. There are soft inquiries as well which do not affect your credit. Soft inquiries are when someone pulls your credit without your permission, such as preapproval card or if you pull your own credit.
The last component of your score is types of credit. This takes into consideration revolving debt, secured debt, installments, medical bills and any other debts. You want to avoid taking out multiple credit lines as this will show a need to live off of credit.
Today we have learned how our credit scores are calculated. This knowledge can be priceless in preventing future credit problems, or rebuilding your current status. With a little effort and time you can now be in charge of your credit future!
