Checking your Credit Score
Do you check your credit report for inaccuracies? The government allows U.S. residents to request their credit report yearly. It is essential to check your report for the chance to correct information as well as catch cases of identity theft or fraud.
All three credit reporting bureaus, Equifax, Experian and TransUnion, provide information that you can view online or in print free of charge. Information within a credit report includes secured debt, unsecured debt, your payment history, employment history and homeowner/renter information.
Take the time to verify the information within these free credit reports is correct. Don’t just check one and figure things are fine with all three. Each company reports information differently and may have inaccuracies.
If you wish to see your three-digit credit score, also known as your FICO score, you may be required to pay a fee. Before agreeing to the terms set forth by the three credit bureaus, contact your bank. Some banks and credit unions will retrieve this information for you if you approach them for information on loan products.
Determining a Credit Score
The three major credit-reporting bureaus look at your financial history when tallying your credit or FICO score. The actual breakdown is as follows:
- 35% payment history, both recent and past
- 30% amount of money you owe all creditors
- 15% length you’ve held and successfully paid on your accounts
- 10% number of credit cards/loans you’ve applied for in the past year
- 10% number and type of loans you currently hold and have held in the past
Credit Score Ranges and the Bottom Line
Credit scores range from 300 to 900. The higher your score, the more attractive you are to lenders. In today’s economy, a credit score of 675 to 699 is considered good, but lenders are more likely to approve clients with a score of 700 or higher.
Video: Why Knowing Your FICO Score is So Important
Fannie Mae and Freddie Mac underwrite mortgages for credit scores of 620 or higher. A credit score of 619 or less leads to high-risk mortgages that add on hefty fees and much higher interest rates.
The same is true of car loans, college loans, personal loans and credit cards. Banks want people with positive credit histories. They look for people that pay on time. They want people who pay off loans per the terms of agreement. Financial institutions avoid people who have filed for bankruptcy or have a history of failing to pay on time. With a lower credit score, you end up spending more money.
Look at a current listing of mortgage rates (March 2009):
- 720 to 850 = 4.785%
- 700 to 719 = 4.910%
- 675 to 699 = 5.448%
- 674 to 620 = 6.598%
Using these rates, a $150,000 mortgage costs a borrower with a FICO score of 720 approximately $130,000 in interest over the life of the loan. Someone with a score of 620 pays interest of $190,536. Moreover, the monthly mortgage payment increases from $778 per month for good credit to $946 per month for poor credit. You pay more every month because of the increased interest rate.
If you think your credit score is only used for loans, you’re mistaken. Insurance companies use credit scores to determine rates. These companies feel that credit scores determine high-risk customers and raise rates on homeowner, renter and auto insurance policies.
Video: How Insurance Companies Decide What Kind of Risk You Are
Employers use credit reports to determine a potential employee’s reliability. Credit scores are used to determine if a phone company, electricity company or satellite/cable television company will require a hefty deposit before granting you an account. Credit scores affect your life in more ways than you would imagine.
Save Thousands by Improving your FICO Score
The most effective way to improve your credit score is to pay on time. A payment that is late by a few days will not show up on your credit report, but anything thirty days or later does count against you. If you miss a payment, get caught up that same month if possible.
Report discrepancies in your credit report as soon as you notice them. Remain proactive about following up with the financial institution. Many put off notifying the credit bureaus about mistakes they’ve made. While you may have corrected an error with your creditor, it may show up on your credit report until you push to have that information corrected.
If you have a lot of credit card debt, pay it off. Start with the card with the lowest balance and make extra payments to decrease the balance owed. Don’t cancel the card, but cut it up and stop using it.
Avoid switching balances from one card to another. Opening new accounts drops your score. Additionally, many people switch a balance without closing an account and then become tempted to use the older card in an emergency. If you receive an offer for a lower interest rate, negotiate that same new rate with your current credit card company. Many will match competitor’s offers to prevent losing you as a customer. If you do decide to switch, cut up the old card and do not touch that account again.
Finally, remember that credit inquiries reduce your score. If you are planning to refinance and purchase a new car, do them at the same time so that your credit report is only accessed one time. Avoid applying for new credit cards shortly before applying for a new loan. These simple steps save you money in the end because of a higher credit score.