What is a Credit Score?
In short, it is a measurement of your credit history. Creditors report information to three credit bureaus (Experian, TransUnion, and Equifax) about how credit worthy an individual is, and, over time, translates to a credit score. This score can be used to evaluate potential risks so the creditor avoids losses due to bad debt.
How to Get Your Credit Report
Under the Fair Credit Reporting Act (FCRA), Americans are entitled to one free credit report in every 12-month period from each of the three credit bureaus. By going to AnnualCreditReport.com and requesting your free credit report. You can also call 1-877-322-8228 or complete Annual Credit Report Request Form and mailing it to the Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281
Review Your Credit Report
After you receive your free credit reports from all three credit bureaus, look them over to check for errors. Approximately one of every five consumers have errors on their report. Things to look for are:
- Name misspelled
- Wrong social security number
- Wrong address
- Paid-in-full debt showing still open
- Inaccurate missed payment
How Credit Scores are Graded
FICO credit scores range from 300-850. There are five factors that are used to calculate the score.
- Payment history: 35%
- Outstanding debts: 30%
- Length of credit history: 15%
- Types of credit you use: 10%
- Amount of new credit: 10%
Payment History
One of the biggest factors that make up your credit score is your payment history, which makes up 35% of your score. If you are unable to pay off your credit accounts each month, making minimum payments to each is one of the fastest ways to raise your credit score. Sign up for email or text reminders to help you remember to pay your bill before it’s due. Setting up auto-payments is also a great way to stay on top of your payments.
Should You Close Zero Balance Credit Cards?
If you have credit cards with a zero balance, do not close them out. This lowers your available credit and increases your revolving utilization percentage, which compares your credit debt to your total credit limit. To calculate this, divide your balance by your credit limit. For example, a credit card with a $2000 balance with a $5000 credit limit would be 40%.
If you have zero balance credit cards, it is recommended to use them sporadically for small items like a cup of coffee and pay them off in full each time.
Can I Get A Loan With A Low Credit Score?
The lower your score, the higher your interest rate will be. For some loan programs, you need a specific score to qualify. Here is the range of scores to give you an idea of how they rate:
- Best (800-850) – Access to the best interest rates and offers.
- Very Good (740-799) – Wide variety of options to choose from with great interest rates.
- Good (670-739) – Most borrowers are in this range and according to Experian only have an 8% chance of becoming delinquent.
- Fair (850-669) – Interest rates in this range are a little bit higher
- Poor (300-579) – Borrowers in this range are considered very high risk. There is a possibility of additional fees or deposit in exchange for a loan or they may be declined completely.
Is A Debt Consolidation Loan A Good Option?
These are usually a personal loan that takes all of your outstanding debts and combines them into a single monthly payment.
Benefits are improving your credit utilization and avoiding missed payments.
The downside to these types of loans would be inadvertently accumulating additional debts while paying off your new Consolidation Loan. This might be too difficult to keep up with and you might end up in more debt than you started with.
Credit Counseling
There are agencies who specialize in analyzing your debt and suggest options to help you save money. They may also contact your creditors to help negotiate your payment amounts. If you choose to work with a credit counseling agency, be careful who you choose. Ask about fees, pricing, services, and products they offer and avoid companies reluctant to provide upfront information regarding their fees and tactics.
Maintaining a good credit score throughout your life can help make obtaining credit so much easier and less expensive. Making these small changes can make a big difference over time and are great habits to keep for a lifetime.
