Credit Score

Credit Scores 101

Welcome to 2016. I’m claiming this be a year for everyone to get their mind, body and spirit on one accord as well as improvements in your finances. If you are looking for a place to start to get your finances right, start here with this all encompassing number known as your

Credit Score
This number is the key to your financial life. With a high credit score, you’re proving to financial institutions that you are responsible for how you manage your assets. Your list of assets may include a mortgage, your checking account, a student loan, a brokerage portfolio or line of credit. The credit score measures how you manage paying off your student loan or mortgage, how many times you open up new lines of credit and many of your other money habits. So class is now in session…let’s begin.
What is a Credit Score?

 It’s simply a measure of how reliable you are for credit or how likely you are to repay a debt. Generally this number is within the 300-850 range with some credit bureaus having ranges that slightly vary.

 

How many do I have?
For all intents and purposes, you have three that really matter. One from Experian®, one from TransUnion®, and one from Equifax® . Each of these credit bureaus have slightly different algorithms/methodologies to calculate your credit score and different companies can use one or more of the three for their primary credit check.
What are some things that effect my credit score?

This list isn’t all inclusive, there are some other factors that different credit bureaus use to measure credit worthiness but here’s a list of things you can control to help yourself out:

1) On-time payments – Don’t you like consistent and reliable people who show up on time and ready to participate in whatever activities? Well credit bureaus do too. That’s why they show favor upon people who make on time payments that never get bounced or returned for insufficient funds.
2) Credit Inquiries/Request for new accounts – if you are looking to open up a new line of credit or get a car loan, you should really consider making sure that your latest inquiry has not happened in the last 6 months. A credit inquiry occurs when you open an account at Belk, a car loan, a mortgage or even some background checks do a credit report. If you can, wait at least 6 month between each inquiry so that you can make sure your credit score recovers before another inquiry.
3) Length/age of lines of credit – The older your credit is and the more you’ve paid on it, the better your score will be. For you 20 somethings who have a student loan that’s about 3 or 4 years old, keep paying on them because once the age of your loan is about 7 years or more, you will see improvements in your credit score.
4) Amount of available credit used – If you have a $5,000 credit line and you have a $1,000 balance on it, then you are only using 20% of your available credit. You are doing great! Using 20% or less of your available credit has a big impact on your credit score. If you can pay down those credit cards to use 20% or less then you will also see improvements in your score.

How can I monitor my credit score for free?
If you neglect to check your credit score, there can be some history accumulating that you have no idea about. Someone could have opened up a line of credit in your name and  failed to make payments on time and you have no idea. But when you have finally saved up for a 20% down payment on that Mercedes-Benz CLA AMG45 and you go to the dealer only to get denied for financing the remaining cost, you’ll know something was up with your credit score.
Monitoring your credit score can mitigate risks against fraud and identity theft because you can see what transactions effect your credit score and when.

Those of you who read my post on financial goals for 2016 know I did a mini-review on the app Mint. Mint actually helps you track your credit score using the Equifax system to generate a monthly update. Capital One also can help you monitor your credit by helping you monitor your TransUnion credit score. Fortunately neither of these methods count as an inquiry so you won’t be hurting your credit scores by using these tools. But if you aren’t using/don’t plan to use an app or don’t have a credit card issuer that helps you track your credit score, you can always get a free credit report from annualcreditreport.com which displays all 3 scores from the major credit bureaus.

Let me know if you have any other questions. I’ll do my best to answer.

Til next post folks…

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