In today’s struggling economy, a good credit score is more important than ever. A credit score that was good enough to get a loan in the past may not cut it as easily today. Creditors are tightening the reins on lending, while credit scores are increasingly touching on more and more aspects of a consumers financial life. Insurance companies use them as a component of their pricing engines, employers use them to screen employees and landlords demand a peak at your credit file before renting an apartment to you. Good credit health is essential. Yet many people have no clue what their credit score is or what it means.
A credit score is a three digit numeric expression of credit report. It tells lenders your creditworthiness and the likelihood of you repaying a loan. In most cases, the higher your credit score the better, it is. In general, if your credit score is above 760 then you are doing just great. Currently, the average American has a credit score that comes in right around 690, which is considered good. But, even a 690 credit score provides no guarantees when it comes to getting a loan. With the current state of the economic climate, banks are much less likely to even lend to good credit consumers and when they do it’s often at a higher price. You can check your credit score for free at www.creditkarma.com.
If your credit score is less than 690, you’ll want to take steps to try and proactively manage the number. The easiest and most basic step in trying to improve your credit score is to request a free credit report from www.annualcreditreport.com. You should do this at least once a year. You’ll notice there are three different credit bureaus:
Equifax
Experian and
TransUnion
Be sure to review the full report and make sure your bank accounts, any late payments, and all other information is listed correctly. If something is wrong, report it immediately to the proper bureau. They are required to respond to you within 30 days.
Now that you know what’s in your credit report and what your credit score is, it’s important to maintain good financial health. The best way to keep a steady credit score is to keep paying your bills on time, every single month. Keep your balances low on your credit cards, and pay more than minimum payment. Closing your oldest credit accounts is not recommended, since this can also lower your score, but you do want to free up your available credit as much as possible. Getting rid of collection accounts can have a dramatic effect on your credit score, as well as limiting how many new accounts you open. You’ll also want to monitor your score monthly for fluctuations that might indicate identity theft.
These simple steps can help you manage your credit score and help you improve it over time. Smart money management however is the absolute key towards getting a great score and over time, the effort you have put in will pay you back with lower interest rates and a greater ability to get the loans you need.
Today’s guest post comes from Ken Lin, CEO, Credit Karma.
If you would like to guest post here at How I Save Money just leave me a message through the contact form.
I know the writer has a good reason to say why the credit score is important, but let me explain to you how most lenders look at it:
We’re concerned with an overall range of a score: 600-650, 700-750, etc. We mostly care about the details of that score. How much debt do you actually have, what kind of debt do you have, and how does that debt compare to your income? Many banks throw out the score all together and use their own calculations which are more accurate.
No offense to FICO, but any decent lender is more concerned with a ratio to your income.
I agree with you that the number is not the most important thing, but I think the writer was reaching out to the average person who I have found really DOES think that it is just the score that matters.
I have friends who think like this and before I started blogging I did not realize that the composition of your debt was more important.
I thank the writer for the guest post and you are welcome to write a rebuttal of sorts as a guest post if you would like. 🙂
After getting my reports last week, I was surprised at what I didn’t get full marks for. Like apparently having a credit card for “only” 9 years isn’t long enough to qualify as sufficiently “old”? And I haven’t had to buy anything on an installment plan since my student loans – which I paid off 8 years ago, 2 years early. Why shouldn’t I get top marks for managing my finances well enough that I only need credit for really big things? And I live in NYC, which means no car, which means no car loan, which means no need for the most obvious installment debt. Geez.
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I had 20 open credit accounts and a credit score of 710, I closed 16 accounts and my credit score dropped to 555. I than opened two new accounts and my credit score increased to 697. The FICO score is a silly game used to fool ignorant consumers and protect banks and predatory credit card companies. If I never miss a payment in ten years, than pay off the account and than choose to close it, why should I be punished with a lower FICO score? The answer: the banking industry and credit card industry want to encourage people to incur debt and punish people who do not incur debt and they’re primary weapon is the FICO credit score. Actually, a credit score is just a data entry that is associated with your ssn and name in a data base at a Transunion, Equafax and Experian and any of the credit reporting angencies can manipulate the finance model that determines average FICO scores based on the needs of Banking and Credit Card companies at the expense of the average citizen.
How much will my credit score increase if I were to pay off 50% of my credit cards within a 2 month time frame? My current credit score is 568 and Im hoping to increase it to 700 🙂 Im planning on getting a car by the summer and I want a great credit score…
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The best ways to maintain your score are to 1) keep your credit utilization ratios low; 2) pay your bills on time; 3) keep old credit cards active even if you don’t use them (canceling can have a negative impact on your score); 4) check your report regularly to ensure accuracy.
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Haha, you know me Lulu, I just couldn’t resist NOT posting a comment.
I use to be like everyone else and try to keep my credit score high. I think it was around 730 at one point. Then, I got smart. I started following Dave Ramsey who is 100% against credit and anything about it.
Now, I could care less what my credit score is. A year ago this month, I took all of my credit cards, put them in an envelope, sealed it and haven’t opened it since. I have paid off all but one card and am working on that and my student loans.
I will be the first to say that credit is NOT needed. I can’t think of a single instance where I have needed it in the past year. I tend to follow the mindset that, if you want something, save up and pay cash. You can often times strike a deal by paying with cash and the purchase won’t haunt you down the road with killer interest penalties and nagging payments that suck your paycheck dry.
The whole process of a FICO score ( I love debt score ) is totally flawed, as you can see by the “housing crisis” today. Banks gave loans to people based solely on a silly number and didn’t bother to look and see if they could actually afford the note each month.
Why should I have to get debt so I can get more debt because debt is how I buy stuff? News flash – cash buys stuff better than debt!
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Yes Shawn I knew you could not resist….in fact I was wondering when you would come out of hiding on this one. 🙂
I thank my poster for the guest post….and I use CreditKarma too.
I am paying off my ‘evil’ credit cards too….only have one left!!!!!!
Remember, I also say that no one NEEDS credit….but credit cards can be a useful tool IF you have the discipline and desire to use them correctly.
Oh…go to St. Lucia for the cruise. Please pretty please.
Oh yeah? I take it you have been there before?
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Only for 19 years!!!!!!
I have to say that I ruined my credit score so badly that for a time, I had trouble getting a credit card. In fact, part of my “therapy” was to NOT use a credit card and to pay cash for everything.
But that’s not always easy to do. Get a cell phone without a credit card? Uh uh! None of the comapnies would let me sign up with them. Then I discovered that if I got a phone without a contract I didn’t need to have good credit OR a credit card.
I went to Wal-Mart and got a Tracfone prepaid phone and I love it! No one else can tell the difference anyway so why not!
I recently came across an article in the paper on other reasons that this is the way to go here.
(Saving money is the best reason. LOL!)
How would I start to fix just horrible credit? I doubt I will ever be able to come out of it, but I now know the horrible truth that I wasnt taught at a younger age. I have defaulted on every card I have ever had. I am only 22, so I hope I still have time to dig myself out. I need to change my life, with money, but I just need help in the right direction. I am looking at about 17k in debt.
I agree wholeheartedly about using a prepaid phone. No bills and no contract. Plus, TracFone now has a touch screen, which is pretty modern for them.