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Understand Your Credit Score

HERE’S A QUICK GUIDE TO MAINTAINING A STRONG PROFILE

Your credit score is a measure of your past ability to make payments on time and manage your credit. It helps lenders determine how risky a borrower is. Credit scores range from 300 to 850. About 46% of Americans have scores of 740 or higher. 

800 to 849: Fico scores in this range are considered exceptional and will give you the best loan offers at the lowest cost.  

740 to 799: Credit scores in this range are classified as very good.  Although you would be good candidates to get a loan, the interest rates might be slightly higher. 

670 to 739: Fico scores in this range are considered good. Borrowers in this range will pay more for their money than the best advertised rates. 

580 to 669: A score in this range would be classified as fair.  With a below-average credit score, your options are reduced, and you will pay a premium for your loan.   

Below 579: A credit score under 579 puts you in the category of a very poor borrower. Loans will likely be denied or at extremely high interest rates to compensate for the additional risk.  

Want to increase your score? Consider the following key areas:  

HIGH BALANCES:  Keeping a big balance on a credit card can increase your credit utilization ratio, which is the percentage of your credit limit that you use. The ratio is calculated using the end-of-month balance that appears on your bill. Your score can suffer even if you pay off your balance every month. It is recommended that you use less than a third of your credit limit. 

Tip: To obtain the best FICO scores, keep this under 10%.  

CLOSING ACCOUNTS: Closing a credit card account can hurt your credit because it lowers the amount of credit you have available to you and hurts your debt utilization ratio. This also impacts the length of your credit history which reduces your score.

Tip: You can stop using cards without closing accounts.  

CREDIT TYPE: If you have several credit cards in your name, but no loans, your credit might suffer. Credit scoring systems reward consumers who have different types of accounts. Revolving debts, like credit cards, are viewed less favorably than loans. 

Tip: If you are considering buying a new car and can afford the payments, taking out a car loan could boost your score.  

LATE PAYMENTS: Your payment history is one of the biggest factors that is considered. Late payments on credit cards, student loans, mortgages, bills and even unpaid parking tickets can all bring down your score.  

Tip: If you have difficulties paying a bill, reach out to your lender.  Most will work out a payment plan that will keep your credit rating intact while you pay down your debt.  

DEFAULTING: The most obvious credit blunder is defaulting on a loan or credit card. The biggest hits come from declaring bankruptcy or foreclosure, which can easily slice 100 points or more from a credit score.

Tip: Bankruptcies stay on your credit report for 7-10 years depending on the type of filing. 

TOO MANY LINES OF CREDIT: Having some credit is good for your score, but there is such a thing as too much. Every time you apply for a loan or credit card, the lender makes an inquiry into your credit history, which usually knocks off several points from your credit score.

Tip: Avoid store credit card promotions that create inquiries on your credit report.  

CO-SIGNING: By co-signing, you are assuming equal responsibility for the amount owed. Any late payments or defaults will show up on your credit report.

Tip: Just say no. 

It’s important to monitor your credit regularly to check your progress, and check for errors.  You can obtain your credit reports for free from each of the three major credit reporting agencies (Equifax, Experian, TransUnion) or once a year through www.annualcreditreport.com.

Pat Sokolowski is a certified financial planner for Metis Wealth Management and Planning.