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Managing Credit: Your Credit Score

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(CBS)

(CBS)

420x316-grad-lee Dee Lee
Dee Lee is a Certified Financial Planner who received a diploma in...
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BOSTON (CBS) – Knowing your credit scores is important. Credit scores are a quick and easy method for a creditor to judge you as a potential customer. They don’t want to worry about you defaulting on your loan.

Credit scores are not free, but when you are getting your free annual credit report the reporting agencies will offer you a deal and they are not too expensive. It wasn’t too long ago that creditors kept everything about credit scores a secret.

You need to understand what makes up your credit score. There are five areas that will affect your credit score: your payment history (do you pay your bills on time?), credit utilization (amount of available credit compared to how much credit is used), length of time you’ve had credit, new credit and your credit mix (revolving debt, mortgage, loans).

MyFico, a division of Fair Isaac (the company that invented the credit score), also will sell you copies of your credit scores and they have good information on their website on how to improve your score.

There is now the Vantagescore out there as well. It was developed by the 3 major agencies, Experian, TransUnion and Equifax and uses a formula not too much different than the FICO formula. They use letter grades to rate an individual; A thru F. Experian will only sell you their Vantagescore.

Credit scores are important for a lender looks at the score and will determine by that score what interest rate you will be charged for your mortgage or credit card. Insurance companies look at the score and determine if you are a good risk or if they should charge you higher rates. A landlord will look at the score to see if you pay your bills on time. And some employers are now asking to review your score as well.

The higher your credit scores the lower the interest rate will be. According to MyFico a person with a credit score of 760 or better will pay $205 less per month for a $216,000 30-year, fixed-rate mortgage than a person with a credit score of 620 – that’s a savings of almost $2500 ($2,460) per year. That is $75,000 over the life of the loan.

A new law went into effect on July 21, 2011. It requires that lenders provide a credit score and related information in an Adverse Action Notice sent to a consumer when they are declined for credit.

So how do you improve your credit score? The best and easiest way to increase your score is to make payments on time and not max out your credit cards. These two factors comprise over 60% of your score! Pare down your outstanding credit by paying more than the minimum each month.

Longevity is a big plus on your credit score as well. That’s worth about 15% of your total score. I have had a credit card since 1984 which bodes well for my score.

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