How much does your credit score really matter? I’ve heard everything from, “It doesn’t matter at all” to “It’s one of the most important parts of my finances!”
Your credit score matters a great deal. If you have a poor credit score, you’ll likely find yourself unable to get credit at all except for possibly a payday loan where the annual interest charges easily exceed 400%! If your credit score is mediocre, you’ll likely pay higher interest rates on loans such as a home mortgage. Many employers check credit scores before hiring someone.
Having a great credit score doesn’t just happen… you have to make it happen. I tell folks to think of improving credit scores like you would a board game such as Monopoly. If you understand and apply the rules you can win the game.
If you have bad credit, start here:
1. Begin by paying your bills on time. This includes all bills such as utility bills, medical bills, credit card bills, rent or mortgage, and car payment. Never assume that a vendor will not report a missed or late payment to the credit bureaus. My research suggests that just having one payment that is more than thirty days past due can drop your score fifty points or more! ‘Dings’ to your credit will typically remain on your credit report for seven years.
2. Get a secured credit card. These ‘prepaid’ credit cards are an excellent way to begin to rebuild your credit and improve your score. Be sure to get one that reports to all three credit bureaus. Using catalogues for bad credit, can help you build your credit score as long as you make on time payments.
If you have good credit, here is the best strategy for improving your score:
Step 1. Request your annual free credit report (www.AnnualCreditReport.com) from each of the three main credit bureaus: Experian (www.Experian.com), Equifax (www.Equifax.com) and TransUnion (www.TransUnion.com) along with your current credit score from each (you’ll have to pay for this). You can get all three credit reports and scores for a one-time fee of about $40. These credit scores will form the ‘baseline’ for your Credit Score Board Game. According to FreeScore.com:
720-850 = Excellent credit score
680-719 = Good credit score
620-679 = Average credit score
580-619 = Poor credit score
500-579 = Bad credit score
Less than 500 = Miserable credit score
Based on your current score, set a goal for the next twelve months. A good goal might be to improve your score by at least fifty points.
Step 2. Begin by adding up the total available credit on all of your lines of credit including credit cards, store charge limits, home equity lines of credit. Limit your monthly charges to a maximum of 30% of your overall limit. Twenty percent is better; ten percent is best. For example, if you have credit cards and store charge cards whose total credit limits is $5,000, keep your total monthly charges to something below $1,500 (30%).
Step 3. Set up ‘auto-payment’ for credit cards and bills. For me, I have as many recurring bills as possible paid automatically from my credit cards. That way I get bonus points that I can use for plane tickets, hotels, etc. I have my credit cards automatically paid from my checking account each month along with any recurring bills that I can’t auto-pay from my credit cards. Obviously, you’ll need to be certain you have enough money in your checking account to cover all of your bills including these auto-payments.
Step 4. Once every six months, check your score. You can do this by paying a small fee or you can pay a monthly fee for ongoing monitoring. A free alternative is to use www.CreditKarma.com. It does a good job of estimating your score and allows you to do a ‘what-if’ simulation game of actions you can take to improve your score.
Here are a few basic facts about how your score is created:
· 35% of your score is based on your payment history. Make sure you pay your bills on time to improve this score.
· 30% of your score is based on amounts owed on accounts. For revolving credit such as credit cards, keeping charges under 30% of available credit will improve your score. Owing lots of money on lots of different accounts will likely hurt your score. Credit bureaus like to see ‘activity’ so having unused credit cards and lines of credit may hurt your score. Best: use but pay off revolving credit regularly.
· 15% of your score is based on your length of credit history. In general, the longer the credit history, the higher your score. Improve your score by not closing older accounts and not opening a lot of new accounts since the credit bureaus ‘average’ the age of your various accounts.
· 10% of your score is based on credit inquiries. A large number of credit ‘inquiries’ in a short period of time can hurt your score so don’t authorize inquiries unless you really need the credit. Inquiries by you do not affect your score so feel free to check often.
· 10% of your score is based on the types of credit used. Bureaus like to see a mix of types of credit including credit cards, retail accounts, mortgages, finance company loans and installment loans. Not having each one won’t hurt your score but a nice mix will help your score.