This episode discusses what a credit score is, how to know what is considered a good credit score, and why they are an essential part of our financial health. I also give you tips on how you can manage your credit score responsibly.
What Is a Credit Score?
According to wikipedia, “A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bureaus.”
There are three credit bureaus where your credit score is determined. These are Experian, TransUnion and Equifax. They use two credit scoring models known as the FICO Score and VantageScore. Every credit score is measured by the probability of how likely you will be able to pay back debt by looking at how financially stable you are and how you have handled debt in the past.
What Is Considered a Good Credit Score?
One of the most used credit scoring models is the FICO® Score☉ model. This particular model places scores between the range of 300 to 850.
Here is a breakdown of the scores
Exceptional: 800 and above
Very Good: 740 to 799
Good: 670 to 739
Poor: 579 and below
You want to at least have a 700 and above to be considered to have a great credit score.
Why are Credit Scores Important?
Credit scores are used to determine what loans and rates you qualify for.
Other examples:
Insurances use them to set premium prices for auto and homeowners coverage
Landlords use credit scores to decide who they want to rent their apartments to
They are used to choose what credit cards you can qualify for and that's an important factor in determining what credit card limit you have and the rewards you can get from it
Credit scores play a factor in deciding who gets the best cell phone plans and who has to pay a larger deposit for utilities
You control whether or not your Credit Score will be used as leverage or as a roadblock to your financial success.
Tips to Managing Your Credit Score Responsibly
1) Pay Your Bills on Time
Late payments can really hurt your credit score when they are referred to collection agencies. Just a single skipped payment can knock 100 points off of your credit score.
You want to keep your balances low and relatively close to their credit limits. The ideal is no more than 30% of your credit card limit. You want to always pay your credit balances in full. I personally use my credit cards as a debit card and only spend money that I know I have in the bank to avoid this issue. I also have all of my credit cards on auto-payment to guarantee that I will not miss any balances that would hurt my score. If you do have balances, pay them off as soon as you can!!
2) High debt can really hurt your credit score
If you had an old ticket, past medical bills that you forgot to pay, your credit score may pay a costly price. When you don’t pay debt, it may go to a collection account. This usually happens when debt goes unpaid for a period of time, usually with it beginning 30 days after the due date.
3) Be weary of closing old accounts
If you are trying to improve your credit, be weary of closing old accounts. Closing accounts can hurt your credit score and how much so really depending on your current score, the age of the account, and what the credit limit credit was.
Credit scores take into account your oldest accounts and when you close them, the credit history that came from having that account for however long you had it, ends with that.
For that reason, many people usually keep their older credit cards with them even when they do not use it much anymore because they have better cards now with more benefits. If you want to close an old card because it has an annual fee, maybe ask the credit card company if they can waive it first. It never hurts to ask.
You want to use your credit score as a financial tool that will aid you in your future rather than diminish it.
If you have bad or mediocre credit, throughout your lifetime you may exceed six figures from higher interest rates. That’s money down the drain for no other reason besides your poor credit score.
Checking Your Credit Score
You can check your credit score for free once a year for all three credit bureaus. This is because under Federal law, you are entitled to one free copy of your credit report from each credit bureau once per year. I would recommend using AnnualCreditReport.com because you can check all three in that one place.
Personally, I pick a day in the year that is easy to remember like your birthday or whatever date will be memorable to you. The reason you want to check your credit report annually at the very least is because there may be reports on there that were a mistake and are hurting your credit score. You would need to file a dispute to get that taken off of your credit report.
Like every episode, here is a last Reccap of todays episode:
Pay Your Bills on Time
try not to spend what you don’t have
pay off your credit balances and other debt you may have accumulated
be weary of closing old accounts
check your credit report at least once a year to make sure everything is correct and up to date
With all the money you save from having a good credit score, you can make significant progress on important financial goals like saving for your retirement, adding money to your emergency fund or even just getting out of debt faster.
When you make your credit score work for you and use it to give you more options, that is the real power of a great credit score.
-Dominique Mohler
DISCLAIMER: I am not a financial advisor, this is information I have learned from my own experiences and research.
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