By David Yanagisawa, Executive Vice President and Chief Lending Officer
A solid credit score, often referred to as your FICO®
score, is an essential marker that lenders look at when you apply for mortgages, auto loans and credit cards. Employers and landlords also review your score when you apply for a job or apartment rental. While a low score may not prevent you from achieving a goal and a high score may not guarantee you will get the money or job you seek, it’s best to know your score and keep your credit squeaky clean. The best way to do this is to keep an eye on your score and practice good financial habits year-round.
The First Step
Understand that your credit score is based on the most common credit-scoring system, known as a FICO score. The system considers factors like length of credit history, how many credit cards you have, and how quickly you pay your bills. Then a reporting agency assigns you a rating between 300 and 850. For example, a credit score of 720 may get you an auto loan with an interest rate around 5% but a score of 620 could raise your interest to 13%1
. This all depends on many factors, but the interest rate you'll pay for the money you borrow will be determined, in large part, by this three-digit number.
Credit reporting companies analyze these factors to calculate your credit score. This data is grouped into 5 categories, each carrying different weight, to determine the score.
Factors that determine your FICO score. Photo credit: myfico.com
Credit scores can change from good to bad, bad to good and good to great when you make monitoring your credit a priority. Here are a few tips to help you get started or improve what you are already doing.
8 Tips to Improve Your Credit Score
1. Know Your Numbers. Under the Fair and Accurate Credit Transactions Act, you are entitled to receive one free credit report from each of the three national credit reporting companies - Equifax, Experian and TransUnion - every twelve months. They sponsor the only authorized online source for a free credit report at www.annualcreditreport.com.
When ordering your free credit reports you have two options – order all three reports at the same time or spread them out over the year. Subsequent to receiving your free annual credit report, you can purchase your credit report from any of the nationwide credit reporting agencies.
2. Thoroughly review your credit report for any errors annually. This includes looking for accounts that aren't yours, late payments that were actually paid on time, debts you paid off that are shown as outstanding, or old debts that should no longer be reported (negatives should be deleted after seven years, with the exception of bankruptcies, which can stay for as long as 10 years). If you notice anything odd report it to the Federal Trade Commission immediately.
3. Always pay your bills on time. Delinquencies have the biggest negative effect on your score. Set up online bill pay with email reminders to prevent missing a payment. For bills that are the same amount every month, you can set up automatic payments. Some financial management sites offer iPhone and Android apps that will send notifications directly to your smartphone.
4. The length of your credit history is important. The longer you have maintained a positive history with a creditor, the more confidence a financial institution will have that you will fulfill new credit obligations. If you need to close a credit card, close the most recent one you've opened. As long as you don't have high balances or missed payments on any of the other cards, there is no credit score penalty for keeping multiple cards open.
5. Keep your credit utilization ratio low. Your utilization ratio is the amount of your total debt divided by your total available credit. This is another reason why you might want to consider keeping older or unused credit card accounts open. Closing unused accounts without paying down your overall debt on all credit cards changes your utilization ratio because you will have the same amount of debt but less available credit.
6. Pay down your credit cards. While paying off installment loans can help your credit score, it will not affect it as dramatically as paying down, or off, revolving accounts such as credit cards. Lenders like to see a substantial gap between the amount of credit you're using and your available credit limits, so aim to get your credit balances to less than 30% of the available credit limit for each of your credit cards.
7. Goodwill might work in your favor. If you’ve been a good customer, but have had one late payment in the past, it can’t hurt to ask your creditor to simply erase that late payment from your credit history. A request in writing will be necessary and the better your overall payment history and lender relationship is, the better your chances are to receive a good will adjustment.
8. Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix or to get a one-time discount at your favorite department store. Opening new accounts may have a short-term negative effect on your credit score. A new account will affect several calculation factors including the average age of accounts, credit limits and utilization ratio. If you are applying for a mortgage it’s better to focus on maintaining a good standing with your current accounts rather than opening new ones just before you apply.
Maintaining or raising your good credit score can have lasting financial benefits and we hope these tips help you get there! For more information on finance and banking topics visit our Facebook Page or YouTube Channel!
1 Vander Broek, Anna. “How to Raise Your Credit Score.” Forbes 19 Mar 12. Accessed 27 Jul 12. http://www.forbes.com/2009/03/19/raise-credit-score-markets-fico.html