|
You may not know it, and you certainly may not like it, but your credit score determines your life. Employment opportunities, insurance rates, and of course, your ability to get credit, are all determined by your credit score. Insurance: Try to get insurance without giving someone your social security number… why do they need that? They say it’s for identification reasons; in reality, it’s so they can run your credit. A long time ago, some actuary discovered that there was a correlation between people with good credit and good drivers. So, it soon became industry practice to run someone’s credit when they received an insurance quote. Employment: These days, employers are often running an applicant’s credit. The theory is this: if you’re good with your own money, you’ll be good with the company’s money too. That means, it may be your credit score (not your resume) that is most important for a potential career oportunity. Credit: The obvious tie to your credit score is your ability to get additional or new credit. With all of these factors relying heavily upon your credit score, it is absolutely critical that you understand what your credit score is, how it is made up, and how you can improve it. Statistics If your credit score is above 778, congratulations, you are doing better managing your finances than 270 million other Americans. If your credit score is below 575, it’s time to take control because 255 million Americans are doing better than you. Do you know your credit score? You can get your credit report for free online. Here are some statistics on credit ratings: If your FICO (Fair Isaac Corporation) score is above 750 (sometimes 730, depending on the company), your credit rating is considered excellent; 660 – 749, good; 620 – 659, fair; below 619, poor. The score distribution of Americans is:
If you’re like most people you try to avoid seeing your credit score so you are not disappointed. As they say, “ignorance is bliss.” Well, they’re wrong. Someone with a fair credit score will probably pay up to $400 more per month on a mortgage than someone with an excellent credit score. That is because the person with excellent credit is low-risk to a lender and will be offered the lowest interest rate available. It is time for you to know your credit score and start improving it. First, if you don’t know your credit score, get it. Your credit score is based on five major things in your credit history:
Payment History Your payment history is the frequency and amount you've paid on past debts. Every time you have a payment that is over 30 days past due, your credit score is lowered. The best way to improve your credit score is to pay all payments that are past due and pay everything on time from now on. Your delinquent payments can stay on your credit report for 7 years, but lenders may recognize your attempt to pay on time. In the event that a debt has been sent to collections, it will stay on the record for 7 years. If you have a debt that has been in collections for 5 or so years (so it’s almost to the 7 year mark) do not just pay it off. If you do so, you will have “paid collections” on your record for another 7 years. Instead, call the collections company and tell them you fully intend to pay the debt if they will write a letter to each repository (company that does credit reports -- there are 3) telling them to expunge the collection once you have paid. With their affirmative answer, pay it! You have their word that it will not be on your credit report. Amount You Owe The amount you currently owe for your credit cards, mortgage, car, etc. is on your credit history. This can be good or bad, depending on how much you owe compared to the limit you have. My advice to you is to not max out your credit cards, and NEVER go over your credit limit! Your credit report is based on the amount you owe on your credit card compared to your credit limit. Going over your limit lowers your credit score and looks extremely bad to lenders. If your amount owed/credit limit is 0-30%, it is a “green light” to lenders; 30-60%, yellow light; 60-90%, red light. Your credit score will be higher if you have three cards in the green light range as opposed to one card that is in the red light range. Low credit limits also hurt your credit score. Having a higher limit on a couple of your major credit cards will show lenders that creditors trust you by lending you more money. Don’t use the full limit, but raise your limit so your credit score rises. Caution: Having a high limit on many credit cards can also be a red flag for some lenders. Have a high limit on a couple of major credit cards and you should be fine. Hint: Mortgages are on your credit report. If you have many loans you don’t want to continually go to the same bank. Your mortgage broker will help you (he gets paid if you get your loan). Be up front with your mortgage broker about your loans so he can shop at different banks. If he doesn’t know where your other loans are, he might try to get you a loan at a bank where you already have a loan and they could deny you. Length of Credit The length of time you have established credit is important. The sooner you get started building your credit, the longer you will have to create a high credit score. It is a good idea to leave accounts open –don’t close big credit card accounts (such as VISA) after you have paid them off. That way, as you apply for new credit, you will have several accounts “in the green.” This will make you look like you are a good credit risk. It is extremely important to start a credit history as early as possible! If you want to help your children establish a good credit history, buy things (with your child's permission) on his or her credit. He or she will have to cosign with you, so you usually can't start building your child's credit until he or she is 18 years old. This is a good way to help them have established credit when then need it. It is very important, however, to make payments on time, don’t over-do it, and make sure that the spending is kept in check (just as you can help them establish credit, you can also hurt them before they have a chance to get started). Types of Credit There are different types of credit. Generally, mortgages are good (unless you have a lot of them). Credit cards, on the other hand, can be good or bad. Having major credit cards such as VISA, MasterCard, American Express, Discover, etc. is good because lenders will see you as a responsible borrower, and possibly give you a loan when they wouldn’t have otherwise. They may also give you a lower interest rate. Don’t open any more department store cards! If you have them and don’t use them, cancel them (Lowes and Home Depot are okay because you can use them with real estate investments). If you have department store cards that you use, pay them off every month. Do not hold a balance. Note: If you only have department store cards, don’t cancel them because you need some form of credit history. Work on opening a new major credit card (see recommended cards below), and then cancel your department store cards. New Credit Getting new credit cards, cars, etc. can hurt your credit score because your credit is checked each time you apply for something new. Sometimes when your credit is checked it lowers your credit score. Here’s a bit of a clarification on pulling your credit score. There are hard-hit and soft-hit credit pulls. A hard-hit credit pull is not good. This is when a mortgage broker, car dealer, etc. pulls your credit -- it lowers your credit score each time! A soft-hit credit pull is okay. This is when you pull your own credit. You can do this as much as you’d like. It’s important you stay on top of your credit score and review the accounts open in your name. There are several services available which will help you see your score for free, or for a low monthly fee you can be updated on any activity posting to your credit. Good Credit Cards to Use
* Make all cards Platinum or Rewards cards! If you can, make sure all of your cards are Platinum or Rewards cards (these cards offer additional protection or incentives for purchase). Also, when you get credit cards, make sure to get them with 0% interest for 6 or more months. This will give you a 6+ month loan with no interest. There are people who have financed large purchases with this 0% option –just make sure you don’t “max-out” your cards. You have a lot of valuable information available to you in this article. You can improve your credit score because you know what your credit score includes, and what things are important to do to raise your score. Remember, the most important thing you can do is pay your bills on time. Take control of your credit. Start improving your credit score today!
© 2006, Enlightened Wealth Institute, all rights reserved |
||