There are all kinds of ways to measure health. But beyond cholesterol count, blood pressure and body mass index, do not discount the importance of credit score to 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. 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 yours better be in top condition.
Here is some advice on keeping a healthy credit score:
Know your score. Request a free credit report from www.annualcreditreport.com (1-877-322-8228). Review the report for inconsistencies and other issues that need addressing. Then request your credit score from at least one of the major credit bureaus: Experian, Equifax and/or TransUnion.
Know what it is and how it is calculated. A credit score is used by lenders to help determine whether a person qualifies for credit, based on an assessment of the individual’s ability to pay off their debts. The higher one’s 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, “very good”; 660 to 719, “good”; 620 to 659, “fair”; and 619 or lower, “poor.”
Know why it matters. A 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 (the better your credit score, the lower your interest rate, for instance). So having a healthy score can save you money.
Know how to maintain a healthy score. Here are some tips:
- 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 FPA member Kevin Reardon, CFP®.
- 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, stay current. 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 likely will 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, like Social Security, credit card and bank account numbers. Identity theft is a real and growing threat to much more than your credit score.