There are all kinds of ways to measure health – cholesterol count, blood pressure, and body mass index. Do not discount, however, the importance of your credit score when considering your overall financial well-being.
In the credit-based world we live in, there is no denying the impact, positive and negative, this complex mathematical formula has on our lives. From getting a loan to getting a credit card to getting a job, your credit score is important. In fact, just about any entity with which you want to do business is apt to judge you, at least in part, on your credit score. So make sure yours is in top condition.
Here, courtesy of the Financial Planning Association in Denver, Colorado, is advice on keeping a healthy credit score:
Know Your Score
Request a free credit report from annualcreditreport.com (1-877-322-8228). Review the report for inconsistencies and other issues that need addressing and then request your credit score from at least one of the major credit bureaus:
- Experian – experian.com, 1-888-397-3742
- Equifax – equifax.com, 1-800-685-1111
- TransUnion – transunion.com, 1-800-888-4213
Know What It Is and How It Is Calculated
Credit scores are used by lenders to help determine whether a person qualifies for credit based on an assessment of the individual’s ability to pay off his/her debts. The higher ones credit score, the lower the credit risk they present to lenders. Credit scores are calculated from data in five categories. Payment history (on bills, loans, etc.) and amounts owed (credit balances) account for about two-thirds of the score. Length of credit history, new credit, and types of credit used comprise the rest. Credit scores range from 300 to 850. A score of 750 or higher is considered “excellent,” 720 to 749 is “very good,” 660 to 719 is “good,” 620 to 659 is “fair,” and 619 or lower is “poor.”
Know Why It Matters
Credit score is not just a factor in determining whether you get a loan or a line of credit. It often determines how much you will pay for credit. In other words, the better your credit score, the lower your interest rate. So having a healthy score can save you money.
Know How to Maintain a Healthy Score
Here are some tips to maintain your credit score:
- Pay bills on time. Nothing impacts a credit score more than your bill-paying history and habits. And no bill is too small to overlook. “Even a single skipped bill to the utility company can ding you,” said Kevin Reardon, CFP, a financial planner at Shakespeare Wealth Management in Pewaukee, Wisconsin.
- Automate. If you struggle to pay bills on time, set up your online banking to make automatic bill payments or provide payment reminders.
- Instead of skipping a payment altogether, make a late or short payment.
- After a late or missed payment, work toward keeping up with your bills and staying current with payments. Positive payment patterns going forward can overshadow a past payment problem.
- Keep credit card balances low and avoid maxing out cards. Carrying a high level of debt will likely hurt your credit score. Maxing out your available credit surely will.
- Pay down your debt over time.
- Think twice before closing the accounts of credit cards you do not use. Closing credit accounts may actually lower your credit score. If you plan to close an account, start with one you opened recently, and for the sake of credit history, leave your oldest credit card account open.
- Do not open a bunch of new credit accounts at once. It can lower your credit score.
- Protect your personal information, such as your social security, credit card, and bank account numbers. Identity theft is a real and growing threat to much more than your credit score. So, according to Reardon, it is worth considering subscribing to a service that monitors people’s credit reports to identify signs of identity theft.
Source: Financial Planning Association (FPA) ©2015
