Credit Score Magic
High credit scores mean more money in your pockets.
It’s not an illusion that your credit score is a three-digit number, ranging from 300-850 that is used to determine how much you’ll pay on loans, insurance, cell phone service, utility deposits, and whether or not you’ll even receive credit. The higher your credit score number, the better. This little number predicts whether or not you’re a good credit risk and your bill paying habits. Curtis Arnold of www.CardRatings.com states, “Your credit score is becoming as important as your social security number.” Calculations are made using your credit history information taken from your credit report.
Fair Isaac Company (FICO) created the most used and respected credit scoring system. You will have to purchase your FICO score, and they cost less if you purchase them when you obtain your credit report. You are allowed to receive one copy of your credit report free from each of the three credit reporting bureaus annually through www.AnnualCreditReport.com.
Free credit score estimates, or educational scores can be secured, without a fee or having to enter your credit card number, at www.CreditKarma.com or www.Quizzle.com. These scores tend to be very close to your FICO score, so you may want to test one of these websites first.
Another way to receive a free copy of your credit score is to be turned down for a loan, insurance, or apartment based on a negative score. The recently signed Restoring American Financial Stability Act of 2010 amends the Fair Credit Reporting Act to include a copy of your score along with a copy of your credit report any time a company takes adverse action based on either.
The magic of a good credit score is that you can produce more of what you need and want for less money when you have a high number credit score over a low score. The areas of your life that will be impacted are:
- Whether or not you receive credit
- How much interest you pay for credit on all types of loans
- How much you pay for insurance
- How much you pay for your cell phone service
- How much you pay for deposits on utilities
- Whether or not you’re hired for certain jobs
- Whether or not you can rent an apartment
So, use your magic to improve your credit score:
- Obtain a copy of your credit score to know what it is. Your credit score will also contain your credit strengths and weaknesses.
- Fair Isaac, www.MyFICO.com, 800-319-4433, $15.95
- Pay on time. If delinquent payments are your weakness, contact your credit card issuer to have the minimum amount automatically drafted from your checking account monthly so as to never be late again. Do this with every card. You can send in additional amounts during the month to reduce your balances. Payment history is 35% of your score.
- Reduce your debt. If high balances are your weakness, take an extra job to pay down what you owe, become frugal, and by all means stop spending with your cards. Your credit-utilization ration may be your weakness and you may not realize it until you see your credit score. Credit utilization is the portion of your credit card balances compared to your credit limit. Credit limits are being lowered robustly by issuers who are not required to warn you beforehand. Use your magic to check your statements monthly to see if your credit limits have been lowered. If they have, contact the issuer to request reconsideration. Reduce your credit card balances or increase your credit limits to improve your credit score. The level of debt to credit utilization is 30% of your score.
- Keep old accounts open. Don’t close your oldest accounts, even if you pay them off. Age of credit is 15% of your score.
- Limit the number of credit inquiries you authorize when shopping for an auto or mortgage or a new credit card. Multiple inquiries make you look credit hungry and high risk. Credit inquires are 10% of your score.
- Pay attention to your mix of credit to improve your score. Having different kinds of accounts such as a mortgage, car loan, and credit cards shows you have experience managing various kinds of credit. Credit mix is 10% of your score.
- Remember, the magic comes from you to take the action needed to protect and improve your credit score. Use automation and check your monthly statements to stay aware of any changes.
Dr. Mary Ann Campbell, CFP®