Your credit score: what it is and how to raise it
By Bethany McKinney
During recent years, the terms credit score and credit report have been frequently discussed and the importance of one’s credit score has risen. A credit score is a key factor in loan approvals and the interest rate that one will pay. Understanding what a credit score is and how it is calculated empowers the consumer to increase his/her score resulting in greater ability to take advantage of what are currently, historically low, lending rates.
What is a Credit Score?
A credit score is a number which ranges from 300 to 850. It is computed by a formula that uses the information in a consumer’s credit report. The credit score is used by lenders to estimate the likelihood that a borrower will default on debt: the higher the score, the lower the risk of default. FICO is the most widely recognized type of credit score and is the one used by the majority of mortgage lenders.
What is a “Good” Credit Score?
Until recently, a credit score of 720 was considered to be a “very good” score, but in today’s credit-tight environment, the bar has been raised and a score of 760 is now the number that is considered “very good.” Borrowers with a score below 720 are unlikely to qualify for premium credit cards. Mortgage lenders have also changed the standards for borrowers. Before 2008, a score of 620 or higher was enough to qualify for low mortgage rates; today that number is closer to 740. Historically low mortgage rates have resulted in a buyer-friendly real estate market, but with increased credit standards, more consumers are finding these very desirable rates out of their reach as a result of having what is now considered to be a low credit score.
How Can I See My Credit Report?
Credit reports provide all of the information in your credit file that is shared with a potential lender. Federal law mandates that consumers have access to a free credit report once each year from each of the three major credit reporting agencies: Equifax, TransUnion, and Experian. To view your credit report, visit www.annualcreditreport.com and follow the steps listed on the Web site. You can access one report from each agency once a year (a total of three). Depending upon your specific needs, it may be most beneficial to run all three reports at the same time to compare for discrepancies, or to run a report every four months to track changes.
To view your exact credit score number, you must purchase it from www.myFICO.com. However, keep in mind that a report from one of the three reporting agencies mentioned above should provide sufficient details to enable you to estimate your score range.
How Can You Improve Your Credit Score?
Your credit score is based upon several factors: payment history, account balances, length of credit history, types of credit used, and new credit inquiries and account openings.
Take these three simple steps to improve your credit score:
- Make every payment on time; late payments lower your score. The longer your history of timely payments, the higher your score.
- Pay down credit card balances. Try to keep your balance below 50 percent of your available line of credit.
- Do not cancel credit cards. If the cards do not charge an annual fee, it is beneficial to keep cards you never use in a safe location. A portion of your credit score is based upon how much of your available credit you are using, so having more credit available to you will lower your ratio of debt to credit.
Educating yourself about your credit score and taking action through the steps listed above can be a powerful tool toward financial success.
Bethany J. McKinney began her Abacus career working part-time in 2007 while a student at USC. She joined Abacus in August, 2010, as a paraplanner on both the Investment Team and the Financial Planning Team with a focus on project management.
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