A credit score is probably the most important number that we carry through life, and Connecticut Better Business Bureau says there are several ways to maintain and improve it.
The credit score system, developed by the Fair Isaac Corporation, is commonly referred to as a FICO score. The score is a number between 300 and 850 that helps lenders calculate an individual’s credit-worthiness and risk. A FICO score below 560 is considered to be poor, and above 760 is rated as excellent.
It is the result of analyses of consumers’ credit histories and existing habits, and can determine whether you qualify for a credit card, a new car, student loan, mortgage, or business loan, and what your interest rate will be.
FICO weighs several elements in determining individuals’ credit scores:
The first thing any lender wants to know is whether pay your bills on time. This is one of the most important factors in a FICO Score.
Amount owed ………………..30%
Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower. However, if your debt load takes up a high percentage of your available credit, it may reflect an inability to properly pay off lines of credit.
Length of credit history….15%
In general, a longer credit history will increase your FICO Score. However, even people who haven't been using credit long may have a high FICO score, depending on how the rest of the credit report looks.
Types of credit………………..10%
The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
Research shows that opening several credit
accounts in a short period of time represents a greater risk - especially for
people who don't have a long credit history.
Consumers should understand the difference between a
credit score and a credit report.
A credit report shows a consumer’s credit history,
including how much credit they have available, how much of that they have used
and any pattern of late or missed payments.
These reports are maintained by the credit reporting agencies Equifax,
TransUnion and Experian and available free of charge every 12 months.
On the other hand, consumers are not entitled
to have free access to their credit score, which generally costs around
Nonetheless, some credit card issuers
are attracting customers by offering to allow them to check their credit score
without charge every month.
Connecticut Better Business Bureau offers the
following tips to improve or maintain a good credit score:
credit – A good credit history is
essential. If you don’t have any credit
cards, you might consider opening an account, using it sparingly and paying it
off at the end of the month. Someone
with no credit cards tends to be regarded as higher risk than someone who has
managed credit cards responsibly.
AnnualCreditReport.com - Consumers
are entitled to one free report from each of the three companies, from the
government-sanctioned website annualcreditreport.com. It is vital to check these reports for
inaccuracies, and dispute any errors.
Checking your credit reports does not affect your score.
Pay off debt
rather than move it around – Debt is
debt, and shuffling it around from one line of credit to a new one can be a
problem. Opening an additional credit
line to do this can weigh down a credit score.
highest balances first – Though you
may be tempted to pay off smaller balances first, paying down a large balance
on a particular line of credit may raise your score, because it represents the freeing-up
of a larger portion of your available credit.
Don’t hide – If you are over your head in debt, contact your
creditors. If you can start managing your
credit and paying on time, your score should increase over time. Seeking
assistance from a credit counseling service will not hurt your FICO score.
Set up bill
pay reminders – Being late or missing
payments tells lenders that you are not reliable with money. Consumers can set up a reminder of upcoming
payments or automated payment through a financial institution, for utilities,
credit cards and other payments.
Having a lot of available credit is less important to
lenders than how much of it you use, and whether you pay your bills on time.
will find additional tips on managing your credit at through Better Business
Bureau's Managing Credit-Made Simpler.
-By Howard Schwartz, Executive Communications
Director, Connecticut Better Business Bureau
Editor's note: This article previously was posted as part of the Connecticut Business Bureau blog on Patch.