Understanding and Maximizing Your Credit Score
An individual's credit score is most commonly thought of as being linked to their ability to apply for loans (think home mortgages and car loans) and the rates on those loans that the individual receives. Most people are probably not aware that their score may also impact the rates they receive on home and auto insurance policies, the success of an application to rent an apartment, or even their application for employment. A recent article by Consumer Reports highlighted possible impacts of having a low score like paying $4,000 more for a car loan or $200,000 more for various types of credit over one's lifetime. Thus, it is important to understand how these scores work and how they are affected by various actions and events.
5 Key Components of a Credit Score
Payment history and amount of debt are pretty self explanatory, but below are some brief notes on the other pieces of the credit score pie: Length of Credit: The longer one's track record using credit, the better lenders are able to assess the borrower's credit worthiness based on their history. Credit Mix: Successfully paying off multiple types of credit (credit card, student loans, auto loans) highlights a borrower's ability to manage their use of credit and can help improve one's score. New Credit: This consists of inquiries into your credit history resulting from new applications for credit as well as how many new credit accounts one has. Ultimately, an individual who is seen as actively seeking credit will be deemed as a more risky borrower.
(pie chart data from Consumer Reports)
Tips for Improving and Maintaining Your Score -Paying bills on time is a pretty obvious tip but it may not be well-known that, according to a director at Experian, one late payment can stay on your report for seven years from the payment due date. -Don't apply for several credit cards at once. It triggers multiple inquiries into your credit history and also lowers the average age of your credit accounts. Think back to the "New Credit" component of the score. -If you have a card that you aren't using and it doesn't carry a fee, don't cancel it. Canceling the card would lower your available credit and increase your ratio of credit used to credit available which factors into the "Amount of Debt" component of the score. -If you use a rewards card for most purchases and pay your balance in full each month, it may still negatively affect your score if the balance on the statement date is a large percentage of your credit line. This relates back to the ratio of credit used to credit available.
Final Thoughts It is clearly important to stay on top of your credit score and, for those who do not have access to their FICO credit score through their credit card account, there are free resources available to help you. Discover, for example, provides non-customers with their FICO credit score at no cost in exchange for personal information (including social security number). If you are not comfortable giving such information, myfico.com provides a free estimator tool that will give an expected range within which your FICO score is likely to land based on 10 questions. Lastly, it is important to monitor your credit report for mistakes. One in five consumers found a correctable error on their report in a study conducted by the Federal Trade Commission. You can get one free credit report from each of the three major credit agencies (Experian, Equifax, TransUnion) each year. You might as well utilize it.