What do buying a car, applying for a student loan and renting an apartment have in common? They all access your credit report and score to determine your “creditworthiness.” Now more than ever, it’s vital to check and maintain your credit regularly. By learning the ins and outs, you can be in a better position to achieve your financial goals. What’s more, checking may expose errors and is one of the best steps in detecting fraud and identity theft.
While complex, the process of collecting information for your report and generating a score is something that is necessary for consumers to understand. Credit reports contain your personal information and critical data collected by credit bureaus from your lenders. This includes everything from dates of loans to balance amounts. The three leading bureaus producing these reports are Equifax, Experian and TransUnion.
The material in their reports is then used by scoring agencies, such as the Fair Isaac Corporation (FICO). Then, the agency uses its special algorithm or scoring methodologies to generate a number. These scores can typically range from 300 to 850. The higher the number, the better the interest rates as well as an increased likelihood of extending credit. To put it simply, credit scores are used by lenders to determine how likely you are to make your payments on time; it’s best to have a high figure.
There are methods to improve your score and, thus, secure better interest rates, insurance premiums and possibly a job for which you’ve applied. The first is to always pay your bills on time. Your payment history makes up 35% of your FICO score. Another 30% looks at how much you owe, known as credit utilization, so it’s highly advantageous to keep any card balances low. The third criteria that FICO looks at is the length of your credit history at 15% of the score.
Ways to improve this are to have a long-established account, such as a credit card, and not to close accounts that are doing well. The fourth and fifth portions are both at 10% and deal with newness and types. It’s advised not to open multiple lines over a short duration because this negatively affects the FICO score. Also, it’s recommended to have a diversified mix of accounts, which can include credit cards, retail accounts and mortgage loans.
Overall, having robust credit health is empowering and one of the greatest things you can do to help achieve your financial goals. Knowing and understanding your credit score is key to this. Be sure to check your score regularly and take advantage of free annual reviews of your reports to support you reaching your full credit potential. For more information and compelling statistics, please see the accompanying resource by Stein Saks.
This infographic was created by Stein Saks, a TCPA lawyer
