Managing your personal finances depend largely on how you manage your credit. As we are approaching the New Year we thought it is best to educate our readers with some of the most important information on the subject. It is important that you receive as much help with credit as you can to ensure a sound financial future.
Factors that determine your credit score:
- Payment history (about 35% of the score) – Making payments consistently on time indicates responsibility.
- Amounts owed on credit accounts (about 30% of the score) – A large number of accounts with balances may indicate that you are over-extended.
- Length of credit history (about 15% of the score) – A longer credit history generally increases the score.
- New credit (about 10% of the score) – An established credit history, without too many new accounts. Opening several accounts in a short period can indicate greater risk.
- Types of credit (about 10% of the score) – a mix of different types of credit. However, this factor is usually not important if there is other sufficient information upon which to base your score.
Credit reporting agencies use the above factors to determine the type of financial personality you have. Organizations such as banks and insurance companies can use this information to determine how financially responsible you are.
How to improve your credit score:
- Avoid using credit cards if you’re already in financial trouble. Finance charges and other fees will add to your debt burden. However, using your credit card in a time of financial difficulty is better than taking out a home equity loan, where your home is put on the line.
- Don’t get hooked on minimum payments. Some credit card issuers have set their minimum payments as low as 2% of the balance. Others may set it to 4%. If you pay only the minimum, it will take a long time to pay off your debt. For example, if you owe $5,000.00 on an account with 18% APR, making 2% payments will take over 44 years to pay off. Also, you will have paid $12,431.00 in interest.
- Make your credit card payments on time. Avoid late payment charges and penalty fees if you can. Bad problems get worse when you have late fees and higher rates to pay during financial difficulty. It’s worth calling to ask for a fee to be waived if you were accidentally late, or have a good excuse.
- Don’t max out your cards. It’s easy to get hit with over-limit fees. Also, a credit card account close to its limit will cause a big drop in your credit score. Be aware of whether or not your account allows you to spend over your limit, as this is optional. Maxing out your account, or even getting close to your limit will increase your credit usage ratio, which can illustrate a dependence on credit that lenders don’t like to see.
Don’t obsess over a high credit score:
A credit score is a numerical representation of a consumer’s capacity to pay back a loan. FICO scores range from 300 -850 and are categorized as follows:
- Excellent credit: 781-850
- Good credit: 661-780
- Fair credit: 601-660
- Poor credit: 501-600
- Bad credit: below 500
What matters most is the fact that you manage your credit scores above the fair credit score range. Credit scores are calculated from many different agencies and one may vary from another. Your credit score can vary within the same day as well. Therefore, obsessing over perfecting your score might be a waste of your time. Your efforts should be more focused on maintaining your score within a healthy range.
Avoid the Biggest Credit Mistake:
Ignoring your Credit Score is one of the biggest mistakes made by consumers. There may be mistakes in your credit report that you may want to attend sooner than later to avoid any major impact in the future. A regular check on your credit score allows you to identify any potential problems in the way you use credit (such as late payments or high balances), correct anything that isn’t accurate, and even spot signs of identity theft, such as accounts or applications you don’t recognize.
Consumers are entitled to one free credit report every year from each of the three major credit reporting agencies (Experian, Equifax, Trans Union). Pulling your credit report yourself will not impact your score, as this is a “soft pull”. Request your free credit reports at AnnualCreditReport.com.