We have talked before that everyone will forget what your GPA is, but your credit score follows you all of your life!
Well that should tell you that your credit score — high or low — determines how much you pay for credit, insurance, employment and sometimes rental rates. We’re talking credit score 101 here today. Hopefully we will answer your questions below.
• A FICO Score is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you have to repay and how much it will cost (the interest rate).
When you apply for credit, lenders need a fast and consistent way to decide whether or not to loan you money. In most cases, they’ll look at your FICO Scores.
You can think of a FICO Score as a summary of your credit report. It measures how long you’ve had credit, how much credit you have, how much of your available credit is being used and if you’ve paid on time.
Not only does a FICO Score help lenders make smarter, quicker decisions about who they loan money to, it also helps people like you get fair and fast access to credit when you need it. Because FICO Scores are calculated based on your credit information, you have the ability to influence your score by paying bills on time, not carrying too much debt and making smart credit choices.
Thirty years ago, the Fair Isaac Corporation (FICO) debuted FICO Scores to provide an industry-standard for scoring creditworthiness that was fair to both lenders and consumers. Before the first FICO Score, there were many different scores, all with different ways of being calculated (some even including gender and political affiliation.)
Why are FICO Scores important?
FICO Scores help millions of people like you gain access to the credit they need to do things like get an education, buy a first home or cover medical expenses. Even some insurance and utility companies will check FICO Scores when setting up the terms of the service.
The fact is, a good FICO Score can save you thousands of dollars in interest and fees as lenders are more likely to extend lower rates if you present less of a risk for them.
And overall, fair, quick, consistent and predictive scores help keep the cost of credit lower for the entire population as a whole. The more accessible credit is, the more lenders can loan and the more efficient they can be in their processes to drive costs down and pass savings on to the borrowers.
How to repair your credit and improve your FICO Scores
You can improve your FICO Scores by first fixing errors in your credit history (if errors exist) and then following these guidelines to maintain a consistent and good credit history. Repairing bad credit or building credit for the first time takes patience and discipline. There is no quick way to fix a credit score. In fact, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast.
The best advice for rebuilding credit is to manage it responsibly over time. If you haven’t done that, then you’ll need to repair your credit history before you see your credit score improve. The following steps will help you with that.
Steps to improve your FICO Score
1. Check your credit report for errors
Carefully review your credit report from all three credit reporting agencies for any incorrect information. Dispute inaccurate or missing information by contacting the credit reporting agency and your lender.
Remember: checking your own credit report or FICO Score has no impact on your credit score.
2. Pay bills on time
Making payments on time to your lenders and creditors is one of the biggest contributing factors to your credit scores — making up 35 percent of a FICO Score calculation. Past problems like missed or late payments are not easily fixed.
• Pay your bills on time: delinquent payments, even if only a few days late, and collections can have a significantly negative impact on your FICO Scores. Use payment reminders through your banks’ online portals if they offer the option. Consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account.
• If you have missed payments, get current and stay current: poor credit performance won’t haunt you forever. The longer you pay your bills on time after being late, the more your FICO Scores should increase. The impact of past credit problems on your FICO Scores fades as time passes and as recent good payment patterns show up on your credit report.
• Be aware that paying off a collection account will not remove it from your credit report: it will stay on your report for seven years.
• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor: this won’t rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. Seeking assistance from a credit counseling service will not hurt your FICO Scores.
3. Reduce the amount of debt you owe
Your credit utilization, or the balance of your debt to available credit, contributes 30 percent to a FICO Score’s calculation. It can be easier to clean up than payment history, but it requires financial discipline and understanding the tips below.
• Keep balances low on credit cards and other revolving credit: high outstanding debt can negatively affect a credit score.
• Pay off debt rather than moving it around: the most effective way to improve your credit scores in this area is by paying down your revolving (credit card) debt. In fact, owing the same amount but having fewer open accounts may lower your scores. Come up with a payment plan that puts most of your payment budget toward the highest interest cards first, while maintaining minimum payments on your other accounts.
• Don’t close unused credit cards as a short-term strategy to raise your scores.
• Don’t open several new credit cards you don’t need to increase your available credit: this approach could backfire and actually lower your credit scores.
So, your FICO score is based on your past history and current habits of managing your money. Is it important? You bet! It can save you money and help you obtain the employment you want. It shows that you are responsible and honor your commitments.
A low credit score is not a life sentence — you can change your score — just by taking charge and managing your money! At ESB Financial, we want to help you be successful to achieve your dreams. Our bank is BIG on YOU!!
— Information for this article was obtained from FICO, Experian & Equifax websites.