Mastering the Basics of Credit Scores

You probably carry around credit cards or took out a loan for a major purchase at least once. As a result, you also carry around a credit score – a nebulous number you definitely can’t take for granted. Here are some common facts about credit scores and ideas of how to give yours a turbo boost.

The most commonly used credit score comes from the Fair Isaac Corp. (FICO) and is vital to your financial health. FICO bases scores on such areas as your payment history, current debt, types of credit used, length of credit history and new credit. According to the company’s measure, scientific analysis and calculation, the highest score is 850.

Congratulations if you are at that level. Most people’s scores never reach such heights.

Each lender interprets scores uniquely. Most lenders do agree that any score above 750 is excellent, around 650 fair and under 600 poor. The closer you are to a 750 or above, the more likely a lender approves you for credit and charges you lower interest rates.

How can you improve your score? First and most important, pay all your bills on time. Late and skipped payments can really hurt your score.

Next, keep balances on your credit cards as low as possible. Paying off debt works far better than moving debt from card to card, and pay off the cards that carry the highest interest rates first.

You score drops every time you apply for and open a new credit account. Use good judgment with those applications you receive in your mailbox. Keep card balances lower than your credit limit.

Your FICO score, based on your credit report, summarizes your credit risk. You must request and inspect your credit report at least annually but preferably every four months.

Each year you can receive a free copy of your report from www.annualcreditreport.com. A number of other websites say you can receive a free credit report; some then ask you to provide a credit card to get a free report.

How do they define “free?” Only Annualcreditreport provides no-strings-attached reports from the three major credit reporting agencies: Equifax, Experian and TransUnion.

Once you get your reports, scan them for inaccuracies. Contact the reporting agencies with the correct information as soon as possible. Inaccurate information can lead to you being denied credit or paying a higher interest rate.

Your profile also contributes to your credit rating. The ideal carrier of credit, at least in the eyes of the credit bureaus, holds a long-standing job, owns a home or rents an apartment for several years and holds just a few credit cards, paying the bills on time. The bureaus also like individuals who do carry some balances, usually 30% or less of the credit limit, because card issuers make money from interest payments.

A low credit score can cost you significant time and money – often in the moments when you can least afford either. Get a higher score for a winning financial life.

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Kimberly J. Howard, CFP, CRPC, ADPA, is a Certified Financial Planner and the owner of KJH Financial Services, a Fee-Only practice in Newton, Mass., and Denver (781-413-4879). Please visit us at www.kjhfinancialservices.com or email Kim at kim@kjhfinancialservices.com. Follow Kim on Twitter at @KimHowardCFP.

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