Financial Pathways: Do not let a bad credit score hurt your plans (column)
When you got up this morning I doubt you gave much thought to your credit score and you most likely didn’t dream about it last night. On the other hand, you may have been dreaming about that beautiful new SUV or that bigger house that you really would like to buy. You may not have given your credit score a passing thought, but it can determine what your interest rate and payment will be and may dictate whether you can even get approved for the home you desire.
Protecting your credit rating is essential not only for getting financing for purchases you need to make but also for your career. Did you know that many potential employers will now check your credit to assess how financially responsible you are? From their perspective if you do not handle your personal finances responsibly, why would you be any more effective at taking care of their company? It definitely raises a red flag, and there is a very good chance that another candidate that is otherwise equal but has a better credit score will get the job over you.
So where do you start to take control of your score? Your first step is to get a copy of your report and thoroughly review it. Go to AnnualCreditReport.com for a free report from each of the three credit reporting companies once a year; your right to it is made possible by our federal government. The three agencies — Transunion, Equifax and Experian — will have similar information and scores, but they won’t be identical. Print the reports for your records and then scrutinize the information for correctness.
Often they will show outdated personal information such as an employer. Anything that is significant and incorrect you will want to correct by contacting the agency directly. You do not want to be confused with someone else having the same name as that could take years to unravel and hurt your purchasing ability until then. Then get into the real meat of the report that shows all of your active credit cards and bills and whether payments have been on time or how late they were. It is shown on a monthly basis and goes back several years. If you have not looked at your report before, you will be amazed and possibly shocked, at the detail.
Confirm that accounts that have been closed happened as stated. You do not want a merchant to state that you did not pay your bill and they had to close the account when what really happened was that you paid off a card and you closed the account. Also, if you have any judgments, liens or bankruptcies, they will show up. You will have an overall credit score that is reflective of your credit debt and bill paying history. The range of credit scoring is from 300 to 850. This is your FICO score that looks at both positive information and negative information in your credit report.
Almost all lenders use the industry standard to measure credit worthiness. 35 percent of score comes from your payment history, 30 percent from the amounts you owe, 15 percent from length of your credit history, 10 percent for new credit opened and 10 percent from the types of credit you have. A credit score of 300 to 579 is considered risky to a lender, 580 to 669 is below average, 670-739 is good, 740 to 799 is very dependable and 800 to 850 is exceptional.
Clearly the real goal is to get above 800. At that level you are “gold” to lenders, and you have more ability to negotiate financing. Do not be discouraged if your score is lower than you would like because you can greatly improve it with effort over time by being mindful of your spending and bill paying habits. Make it a game and watch it gradually go up. Put the following practices into place:
1. Always pay your bills on time.
2. Pay off your credit card debt. Do high interest accounts first.
3. Keep your credit card balances low. A high debt-to-credit ratio can indicate financial difficulty.
4. Open new accounts only if needed. Hard inquiries for credit to your report can hurt your credit score.
5. Do not close old credit cards — keep history and show availability of credit.
6. Check your credit score as well as your report regularly and correct errors.
If you will start practicing these habits, some of those purchase dreams will become a reality.
Nancy Gardner is a Certified Financial Planner®. She and her husband Bill and their dog Daisy split their time between Summit County and Montgomery County, Texas. Send your questions to Nancy at firstname.lastname@example.org.
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