Like it or not, your credit report and credit score have a great deal of power. They measure the financial risk you pose to lenders.
The higher the score, the lower the risk. Credit scores and reports determine whether you are approved for a mortgage, loan or even a bank account.
It is extremely beneficial to do what you can now to improve your credit score and resolve any errors on your report. If you don’t, it can haunt you for the remainder of your financial life.
The FICO credit score system, developed by the Fair Isaac Corp. is a common measure. A FICO score below 560 is considered to be poor, and above 760 is rated as excellent.
FICO scores are the result of several factors:
Payment History (35 percent): The first thing any lender wants to know is if you pay your bills on time.
Amount owed (30 percent): Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower. However, if your debt load takes up a high percentage of your available credit, it could reflect an inability to properly pay off lines of credit.
Length of credit history (15 percent): In general, a longer credit history will increase your FICO Score. But people who haven’t been using credit long may have a high FICO score, depending on how the rest of the credit report looks.
Types of credit (10 percent): The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
New credit (10 percent): Research shows that opening several credit accounts in a short period of time represents a greater risk — especially for people who don’t have a long credit history.
These tips can improve your credit score:
Establish credit: A good credit history is essential. If you don’t have any credit cards, you might consider opening an account, using it sparingly and paying it off at the end of the month.
Visit AnnualCreditReport.com: Consumers are entitled to one free report from each of the three companies in the government-sanctioned website www.annualcreditreport.com. It is vital to check these reports for inaccuracies and dispute any errors. Doing so won’t hurt your credit score.
Pay off debt, don’t move it around: Debt is debt, and shuffling it around from one line of credit to a new one can weigh down a credit score.
Pay off highest balances first: Paying down a large balance on a particular line of credit can raise your score because it represents the freeing-up of a larger portion of your available credit.
Don’t hide: If you are over your head in debt, contact your creditors. If you can start managing your credit and paying on time, your score should increase over time. Seeking assistance from a reputable credit counseling service will not hurt your FICO score.
Set up bill-pay reminders: Being late or missing payments tells lenders that you are not reliable with money.
Melanie Duquesnel is president and chief executive officer of the Better Business Bureau Serving Eastern Michigan and the Upper Peninsula.