Credit Score Basics
What is Credit?
Credit is borrowed money that you can use to purchase goods and services when you need them (Experian, 2015).
Addressing & Improving Your Credit Score
From that pair of shoes you bought today to the mortgage you’ve been paying for three years, every third-party transaction in your financial history goes into calculating your credit bureau or “FICO” score. Your FICO score provides a guide to lenders and uses your financial history to indicate whether you’re a high-risk candidate for a loan.
A low credit score indicates you are a high-risk candidate. Unpaid bills and delinquent balances can quickly become negative factors contributing a decreased credit score. Unfortunately, once your score has been affected, there’s no quick-fix solution. Repairing and rebuilding your credit score is a bit like losing weight; it’s a process that requires attention and dedication. Interesting in learning more about how to maintain good credit, and start repairing bad credit? Continue reading!
Review Your Credit Report
Determining your credit situation begins with checking your credit report.
Once a year, you can request a FREE copy of your credit report. Look it over thoroughly, checking for potential errors, no inaccurate ‘late payment’ reports, and that the balance on each account is accurate. If you do find an error, it’s important to contact the credit bureau and the organization or merchant in question, as both are responsible for correcting inaccuracies. You can request your free copy of your credit report by mail, online or phone (1-877-322-8228). If you don’t come across any discrepancies, take a look at your calculated score, and see where it falls on the spectrum below:
How to Address & Improve Your Credit Score.
If your score is worse than you’d like, it’s important to recognize that improving your credit score is not something that happens overnight. But With patience, discipline and a few guidelines, you can effectively improve and build an excellent credit score.
LET’S KEEP “SCORE”!
Length of Credit History
Did You Know? Your credit history is 15% of your score’s calculation.
Avoid opening several accounts in a short period of time.A collection of new accounts will lower your average account age adversely affecting your credit score. Similarly, if you’re a new credit user, rapid account buildup can flag you for high-risk potential.
Did You Know? New credit accounts for 10% of your calculation.
Reduce the Amount of Debt Owed
Did You Know? Your total debt contributes 30% of your score’s calculation.
Keep balances low. High outstanding debt can negatively impact your credit score. If you’ve already accumulated a sizeable debt, it may be easier said than done, but make a plan to reduce the amount you owe. Not only will this improve your credit score, it will also provide you with a sense of satisfaction and achievement.
In order to effectively put a dent in your debt, stop paying for purchases with credit cards. Then, come up with a payment plan that allocates the majority of your expendable budget to debt payment, placing your primary focus on the card with the highest interest rate, while still maintaining minimum payments on your other accounts.
Pay Your Bills On Time & Setup Payment Reminders
Did You Know? Making payments on time accounts for 35% of your credit score calculation.
Delinquent payments, even if only a few days late, can have a tremendously negative impact on your credit score. Be proactive and take advantage of online banking and online bill pay to help eliminate the likelihood of missed or late payments. Whether you decide to set up online bill pay (a direct draft from a designated account) or schedule payment reminders via text message or email, you will greatly decrease the likelihood of late or delinquent payments.
Closing an Account
Don’t assume that closing an account will automatically improve your credit score. Instead, pay off the balance but keep the account open, use it to make one or two purchases and pay the balance in full each month. Maintaining consistently low balances and regular payments will put you on the road to recovering your credit history. Conversely, a closed account can show up on your credit report, and has the potential be a negative factor in credit score consideration.
Did You Know? The types of credit (on your credit report) makes up the final 10% of your credit score.
If you are having trouble making ends meet, reach out to your creditors or seek advice from a qualified credit counselor.Seeking assistance will help you devise a feasible plan for managing your credit and making timely payments, which will help your score to improve over time.