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FEATURED ARTICLES |
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What's in
a number? Plenty, if the number you're talking about is your credit
score.
Virtually every aspect of a consumer's financial life is affected by
this three-digit number. This includes, of course, the interest rate
you pay on virtually any kind of consumer debt: a mortgage, credit
card, home equity loan or car loan, for instance. But did you know
that your credit score can also affect your auto and homeowners
insurance premiums and your ability to lease a home or apartment?
What is
FICO®?
The credit score is often called a FICO score. FICO is the consumer
credit scoring model developed by Fair-Isaac Corporation that has
become the industry standard for consumer credit scoring. FICO scores
can range from a low of 300 to a high of 850. Each of the three major
credit bureaus (Equifax, Experian and TransUnion) creates its own
credit score for every consumer. |
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If you're in the market for a new mortgage or car, or if you're just
curious about what your credit score is, the best place to go to
obtain your credit score is
myfico.com*.
Here, you can purchase a single FICO score and credit report from one
of the credit bureaus, or FICO scores and credit reports from all
three credit bureaus. There's also lots of educational information
here about credit and your credit score, as well as a loan center
where you can shop online for the best loan terms and rates. |
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How is Your Credit Score Determined?
The best thing you can do to establish and maintain a high credit
score is to pay your bills on time. This is especially true
when it comes to applying for a mortgage. The main concern of mortgage
lenders is whether or not you will make your mortgage payments in a
timely matter, so they assign the highest percentage of your credit
score (35 percent) to your history (specifically, the past seven
years) of on-time bill payment. More recent late payments will hurt
your score more than late payments from several years ago.
The next most important factor in your credit score is how much
credit you use. This factor, known as your credit utilization
ratio, accounts for 30% of your credit score. For installment loans
(like a car loan), the way that this is determined is fairly simple:
Your outstanding balance is divided by your original loan amount. If
you have paid $10,000 of a $20,000 loan amount, for example, your
installment loan ratio is 50%.
For revolving credit - like credit cards or home equity credit lines -
it gets a little more complicated. With credit cards, your current
monthly balance may be divided by your credit limit or the
highest balance you've ever carried. The method chosen by the card
issuer can make a big difference: If you have a $10,000 credit limit
with $7,000 in available credit remaining, your score will be much
more attractive if the credit limit number is used. Also, your credit
card balance probably fluctuates each month (perhaps dramatically) so
your revolving credit ratio may differ greatly depending on when the
card company reports your balance - even if you pay off your card in
full every month.
The length of your credit history accounts for 15% of your
credit score. Interestingly, old credit accounts that you rarely if
ever use work to your advantage here, so closing them may actually
hurt, rather than help, your credit score. The number of recent
credit inquiries accounts for the next 10% of your score - the
more inquiries, the lower your score.
Finally, your debt management history accounts for the last
10% of your score. Lenders want to see if you have experience making
timely payments on different kinds of loans. If you don't have a lot
of debt management history, don't worry too much. The person who has
made timely payments on one or two credit cards for several years may
score just as high here as someone who has made payments on a
mortgage, car loan, school loan, home equity credit line and several
credit cards.
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Improving Your Score
How much of a difference can your credit score make? Look at the
difference in mortgage rates based on various FICO scores. According
to myfico.com, a borrower with a FICO score of between 720 and 850
would qualify for a 30-year fixed mortgage rate of 5.55%. On a
$150,000 mortgage, that results in a monthly payment of $857. However,
for a borrower with a FICO score of between 500 and 559, the rate
jumps all the way to 9.29%, jacking the monthly payment up to $1,238 -
a difference of $381 a month or over $137,000 over the life
of the loan! (These rates and examples change daily, Remember this is
an example)
Numbers like these make it clear just how important it is to build as
high a credit score as possible. Here are five tips for improving your
score:
1. Always pay your bills on
time - your mortgage or rent, utilities, credit cards, car loans, etc.
Late bill payments will especially hurt your potential mortgage rate
and insurance premiums.
2. Don't exceed 50% of your
credit limit on any one credit card.
3. If you know that you will
be applying for a loan soon, pay off your credit card balance at least
one week before the next monthly statement date, which is usually two
to three weeks before the payment due date.
4. Don't cancel any credit
cards - even cards you never use - before you apply for a loan. This
will actually hurt rather than help your score.
5. At the same time, don't
apply for any new cards before applying for a loan, since recent new
credit inquiries will hurt your score.
Written and published by Dan Keating
www.aboutftcollins.com
Photos by Steve Keating Photography
www.steve_keating.com |
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