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CREDIT.
The word alone can send chills down your arm, or make you smile. But in either situation, your credit score is very important and should not be overlooked. You’ve heard the horror stories of your friend that couldn’t get that dream car, or a family member that wasn’t approved for a mortgage to buy a home. On the other side of that fence are the individuals that were “approved” but are paying an astronomical price for the credit they’re borrowing through those escalated interest rates. Whatever the situation may be, we want to uncover a few of the basics for you so you may shop, save, borrow, and ultimately, live better. The reality is, we all depend on credit for so many things in our lives. From student loans, to cars and homes, that simple three-digit number, your credit score, can be the deciding stamp of decline, or approval to your dreams.
Your credit report contains a history of how you’ve paid your bills, how much open credit you currently have, and anything else that may affect your worthiness of obtaining new credit from creditors. All of your information is put into an complex equation that basically determines that special three-digit number.
Lenders use this number to determine how likely you are to repay your loan and/or make your scheduled payments on time. The automated process allows department and electronics retailers to offer instant credit to shoppers.
Most lenders use the “Fair Isaac Corporation” (FICO) scoring method. In the early 1980′s each of the three major credit bureaus (Experian, Equifax, TransUnion), worked with Fair Isaac to come up with the scoring metrics and equation. The exact formula for calculating your personal credit score is proprietary information and owned exclusively by Fair Isaac.
Below is an approximate outline of the metrics involved in calculating your personal credit score. Remember, your credit score is constantly moving in coordination with your activities, typically updated every 30 days.
* Your credit score can range between 300 to 850.
* 35% of your score is based on payment history.
* 30% of your score is based on outstanding debt.
* 15% of your score is based on length of time you’ve had credit.
* 10% of your score is based on new credit.
* 10% of your score is based on the types of credit you currently have.
The information gathered is cross-referenced to the credit performance of other consumers with similar histories and credit profiles. Experian, Equifax, and TransUnion each have their own version of the credit score, however they are all based on the FICO method. Equifax has the BEACON system, TransUnion has the classic FICO Risk Score System, and Experian has the Experian/Fair Isaac Risk System. It is also important to be aware that some lenders have internal proprietary scoring methods based on income or length of time with one employer.
So now that you know the basics, what can you do to stay on target, or even proactive?
* Pay all of your bills on time, period. Where possible, pay them early! This does not only include house and car payments, but even cell phone bills, electric and water bills, or even dentist and doctor bills. Whoever the lender is, they’ll love being paid early, and so will your credit score.
* When possible, pay more than the minimum amount due! Not only will this help you clean your debt faster, it will also positively affect your credit profile. It’s not always possible, but when you find yourself with a few extra dollars, pay extra and be rewarded!
* Whether you have a credit card with a local retailer, or a major platinum credit card, be sure to keep your balance below 50% of your available credit. This proves you can manage your credit and are able to responsibly borrow. This will keep your “emergency funds” available while boosting your credit.
* Don’t close out old lines of credit, even if they aren’t being used! In many cases, people open lines of credit and never use them. Many times, people will even cut the cards up and throw them away. While it’s surely okay to dispose of any cards you’re not interested in anymore, do NOT close the account and line of credit. Keep in mind, one of the metrics of determining your score is “length of time” the credit has been established, so closing out an old account could be a major mistake.
* Whether Spring Break or Christmas shopping is around the corner, do not go overboard in applying for credit. We aren’t saying don’t get credit, we’re simply saying to use caution and to obtain credit wisely. Always analyze your specific situation and needs before filling out a credit application. Asking for too much credit can be just as bad for your credit as not having any at all. Complicated, but reality.
Smiles and Frowns. Nickles and dimes.
So, if you are currently held hostage by less than perfect credit, what exactly does that mean to you and your family?
Bad Credit:
* Difficulty being approved for credit, loans, or even employment.
* Higher interest rates if/when you are approved.
Good Credit:
* Instant-credit availability and opportunities.
* Higher credit limits and flexibilities, even better service!
It’s pretty simple. There are plenty of reasons you should work hard at managing your money and your financial responsibilities, as there are plenty of rewards to great credit.
Example: You have great credit. Your best friend doesn’t. You both are buying matching new cars. Here is a very realistic model of how your credit can affect you.
New Car. Auto Loan. $25,000. 48 Months. Your credit is 720-850. Congratulations on your 6.7% loan. $595.18 per month.
New Car. Auto Loan. $25,000. 48 Months. Your friends credit is 500-589. Pass him a tissue, he’s crying. His rate is 18.6%. $742.23 per month.
Get a pen and paper and store this information in a safe place! You are entitled to a free annual credit report, so take advantage and be proactive! You’ll be glad you did.
Experian.com
1.888.397.3742 (Order by phone)
Equifax.com
1.800.685.1111 (Order by phone)
TransUnion.com
1.800.888.4213 (Order by phone)
Source(s): MyFICO, CreditInfoCenter, CNNMoney, HowStuffWorks
