By Mike DuBose and Blake DuBose
When’s the last time you checked your credit report? Although they may seem boring, these reports contain an important little number: your credit score. That one detail can have a huge impact on your life, whether it’s gaining the ability to buy your dream home, lowering your insurance rates, or even securing a job!
Credit reports are records compiled by credit reporting bureaus that contain information like your bill-paying habits, where you live, and if you’ve ever filed for bankruptcy. This information is used to determine your credit score—a numerical representation of the level of risk extending credit to you poses (i.e. how likely you are to pay a statement or repay a debt on time). Your credit score impacts how much you are charged in interest…or whether lenders will extend you credit at all. As explained by Money magazine, “While your credit reports are simply a track record of your payment history—no judgments—your credit score is more akin to a school GPA. It’s a cumulative number that measures your success relative to others, in this case grading you as a credit-worthy individual.”
Numerous credit score models exist, but the most widely used is the FICO score. It was originally developed by Fair, Isaac and Company (now called Fair Isaac Corporation), a data analytics company founded by Bill Fair and Earl Isaac in 1956. The FICO score measures consumer credit risk and has become a fixture of consumer lending in the United States.
FICO is derived from the following:
FICO scores range from 300 to 850, with “bad credit” being anything below 600 and “good credit” recognized as 700-749. The average American adult has a credit score of 695, which falls in the “fair” range. To obtain premium mortgage and car loan rates and qualify for the best credit cards, individuals must achieve a 740, which is ten points below the threshold for “excellent” credit (750-850).
Due to its impact on interest rates, improving your credit score can save you significant amounts of money, especially if it bumps you into a better range! Fortunately, you can take a number of actions to raise your credit score:
Check your credit report regularly. There are three major credit reporting companies—TransUnion, Equifax, and Experian—and by law, every American is entitled to receive a free credit report every twelve months from each. You may choose to order all three at once or one at a time from www.annualcreditreport.com, the only website authorized by the government to fulfill orders for these legally mandated reports. (Caution: other websites offering free credit scores may try to make you pay fees or even steal your personal information!) If you prefer to access your credit report another way, you may call 1-877-322-8228 or mail a credit report request form to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Note: the three major credit reporting companies will only provide yearly free credit reports through these methods, not if you contact them individually! However, a fourth credit reporting bureau, Innovis, is gaining popularity with lenders, and it is not yet possible to request a credit report from this entity through www.annualcreditreport.com. You can, however, receive a free credit report from Innovis upon request; visit www.innovis.com/personal/lc_creditReport for more information.
Stay aware of your credit score and monitor your reports for any inaccuracies. (This is especially important if you are planning to apply for a significant amount of money—such as car financing, a mortgage, or a business loan—in the near future.) You want to make sure everything is correct on your report so that lenders see your record of responsibly paying your bills. Also, you will know if a stranger has somehow obtained your personal information and is opening accounts in your name. Anyone who is stealing your identity is unlikely to make timely payments, and it could devastate your credit score!
If you spot any unauthorized items or mistakes (such as credit card payments that have not been recorded correctly) on your report, contact the credit reporting agency in writing or online. The agency will communicate the issue to the entity that provided that information (say, a credit card company), which must then investigate and respond to the credit reporting company. If an error is found, changes will be made to your credit report, and all three major monitoring companies will be notified.
Secure a credit card. You don’t have to apply for every card out there (in fact, that’s a bad idea, as each application will “ding” your credit score temporarily), but it’s important to have a credit card or two, even if you don’t need them. Contrary to what may seem logical, it’s better to apply for a credit card, make purchases on it, and pay the bill off completely each month than to only use a debit card or cash. You must have some credit, income, and employment history to secure credit, so showing that you can responsibly use credit cards will be viewed positively in the future when you apply for larger credit lines like a home loan.
Make all credit card payments (and pay other bills) on time. If you fail to make payments by their deadlines, it could mar your credit report for up to seven years! Since payment history is the largest factor in deciding credit scores, place extra emphasis on making at least the minimum payment each month, and pay off any past-due balances ASAP.
In the New York Times, Joshua Rosenblat noted that some rewards cards require certain amounts of spending to unlock benefits, tempting individuals to accumulate more debt than they can pay. In those cases, rewards cards are not worth the trouble! As Rosenblat said, “Remember, the most important relationship between credit cards and your credit score is how good you are at paying them off.”
Don’t max out your cards. Be wary of running up credit card debt! Although occasional emergencies may arise, try to use credit cards as if they were debit cards, spending only what you have in your checking account. Then, pay the statement in full each month.
Credit card utilization—the amount of credit you are using compared to the amount you have available to you—should stay low. Experts disagree on how low, with some saying less than 30% and others no more than 10%, but most agree that the lower, the better. According to a New York Times article by Michelle Singletary, “analysis has shown that consumers with FICO scores over 800 use an average of just 7 percent of their available credit.”
The amount of credit you’re using on one account versus another can also have an impact. Rather than using a single credit card for most purchases, spread them out over several cards so that you’re not relying too heavily on just one. After you’ve had an account for a while and have a record of on-time payments in full, consider asking the company for a credit increase, which will decrease the percentage of available credit you’re using, even if spending stays the same. If your credit is too bad or your history too short to obtain multiple cards, consider making several smaller payments monthly so that the overall percentage of credit you’re using stays low.
The bottom line: A credit score is more than just a number. It’s a defining factor in how you appear to lenders and other organizations like insurance companies—and therefore, how likely you are to be able to afford the things you want in life! Take steps to improve your credit score today, and reap the benefits down the road!
About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, research, experiences, successes, and mistakes. You can e-mail us at [email protected].
Visit Mike DuBose’s nonprofit website www.mikedubose.com for 100+ published articles on business, travel, retirement, and personal topics, and health columns written with Surb Guram, MD, as well as a free copy of his book, The Art of Building a Great Business, based on 30 years of experience with the DuBose Family of Companies and 100 bestselling business books he read. Mike is a retired staff member of the University of South Carolina’s graduate school.
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Blake DuBose graduated from Newberry College’s Schools of Business and Psychology and is president of DuBose Web Group (www.duboseweb.com).
Katie Beck serves as Director of Communications for the DuBose Family of Companies. She graduated from the USC School of Journalism and Honors College.
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