- Your credit score is a snapshot showing how well you manage money and debts.
- Higher scores help you get lower interest rates and payments on loans.
- You can raise your score by paying bills on time and staying well under credit card limits.
If you could choose between saving or squandering hundreds of thousands of dollars throughout your lifetime, the choice would be a no-brainer, right?
Unfortunately, too many Americans have that choice made for them due to a low FICO® Credit Score.
Your financial habits—how much credit you use and how you pay your bills—contribute to your FICO® Score. Over 90% of top lenders use FICO® Scores in their lending decisions. It helps them determine how likely a borrower will be to pay back a loan. Your FICO® Score is important because it can influence what credit is available to you and how much interest you’ll pay.
FICO® Scores range from 300 to 850. The higher the number the better. FICO® Scores are broken into five rating categories from “poor” (less than 580) to “exceptional” (800 and above). The national average FICO® Score is 695, according to FICO.com. With this “good” score, you are considered an acceptable borrower. But you’ll pay a higher interest rate than you would if your score were up in the “exceptional” range above 800.
Higher scores can save you money
Generally, the higher your FICO® Score, the lower your interest rate and payments on a loan. For example, the difference between a 620 score and a 760 score on a 30-year, fixed rate mortgage of $280,000 can be tens of thousands of dollars over the life of the loan.
Higher scores can give you privileges
Lenders aren’t the only ones using your credit history to rate you. Many businesses use credit reports to evaluate job applicants. A better credit history could put you in line for a better career opportunity. “They’re looking at this as an indicator of a candidate’s character and sense of responsibility,” says Kelley Long, a certified public accountant and member of the National CPA Financial Literacy Commission, which offers free personal finance information to Americans at 360financialliteracy.org.
Many landlords perform credit checks as part of the leasing process. A credit check means the landlord is looking at your credit report from one or more of the big three reporting agencies—Experian, TransUnion and Equifax. The information in your credit report is what’s driving your FICO® Score, so it’s all related. According to a 2014 TransUnion survey, 43% of landlords perform credit checks on potential renters and 48% say the credit check is among the top three factors in evaluating lease applications.
You can nudge your score higher
The following will help you maintain a stellar score or nudge your score into a higher rating level.
Know your number. Get your credit score so you know where you stand. Many credit card firms are now showing your FICO® Score on your monthly statement and online for free. If your score isn’t what you think it should be, take action by following the rest of the information in this list.
Check your credit report. Reviewing your credit report should be part of your annual financial checkup. You can get a free report once every 12 months from each of the three credit bureaus at annualcreditreport.com. Check the information carefully. If you find open accounts or delinquencies you don’t recognize, file disputes with the credit bureau.
One technique that allows you to keep an eye on your credit history throughout the year and find errors sooner is to order a free report from just one bureau every four months or so, rotating through the three bureaus. You’ll need to keep track of when you order each report. The 12-month timetable for getting a free report starts on the day you place your order from a particular bureau. Keep in mind that the three credit bureaus do not share information with one another so your data might vary from one bureau’s report to the next.
Pay your bills on time. Your history of on-time bill payments accounts for 35% of your credit score. “Paying every bill on time and in full will save you tons of money down the road by avoiding debt and the resulting interest,” says Ken Lin, CEO of Credit Karma. To make sure you’re always on time with your payments, use auto pay options or set up email and text reminders.
Limit your open accounts. “A high number of cards, with lots of closed accounts, can reflect badly,” says Ethan Ewing, a former Experian executive. Avoid the temptation to sign up for lots of store credit cards just to get special deals. The resulting hit to your score could undue any savings on your purchase.
Older is better. You want to have several open accounts to demonstrate good borrowing habits, but it’s best to maintain the same credit cards for many years instead of frequently switching to new cards in response to card company promotions. “The formula favors accounts that have been open for several years,” says financial expert Randy Mitchelson, who produces the DailyDollar newsletter. “They’re considered ‘seasoned accounts,’ and they carry weight.”
Stay under the limit. Nearly one third of your score is based on how you use your available credit. The formula is considering how close to your credit limits you’re coming every month. While your total outstanding credit debt is a factor, it’s better to have a $500 balance on a credit card with a $5,000 limit than the same balance on a $1,000 limit card. In the first instance, you’re only using 10% of your available credit. In the second, you’re using 50%.
Work with a credit counselor. If your score isn’t where you want it to be and you’re having trouble managing debt or living within a budget, consulting with a certified credit counselor could help get you on the road to financial empowerment. NEA Member Benefits offers tips on how to find a credit counselor you can trust.
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