FINANCIAL FOCUS
Your credit score can play a surprisingly big role in your financial life. From renting an apartment to getting a cellphone plan, your credit score can open doors or close them.
Your credit score predicts how likely you are to pay bills on time. Lenders, landlords and even some employers use this number to evaluate how responsible you appear to be.
A higher score signals that you’re reliable with money, which can lead to lower interest rates on loans, better insurance premiums and easier access to credit. Some service providers may even waive security deposits if you have a strong score.
The most common credit scoring system is the FICO score, ranging from 300 to 850. A score above 670 is considered good, while anything above 740 is very good and above 800 is exceptional.
Most scoring models look at similar factors, with payment history the most important. Making payments on time accounts for 35% of your FICO score, so even one late payment can hurt you.
The second biggest factor is credit utilization, for 30% of your score. This measures how much credit you’re using compared to your total available credit. Try to keep this below 30%. Other factors include the length of your credit history (15%), new credit applications (10%) and your mix of different credit types (10%).
It’s much easier to maintain a good credit score than to rebuild one after it drops. A single missed payment can stay on your report for seven years, dragging down your score and making it harder to qualify for loans or favorable interest rates. Prevention is far simpler than repair.
If you’re looking to improve your score, start with the basics:
• Pay all your bills on time by setting up automatic payments or reminders.
• Keep your credit card balances low and pay them off in full when possible.
• Avoid applying for new credit too often, as each application can temporarily lower your score.
A Chapter 7 or Chapter 13 bankruptcy filing can drop your FICO score up to 200 points. For unpaid taxes, the IRS can report tax liens to your credit report.
Those just starting to build credit might consider applying for a secured credit card or becoming an authorized user on a family member’s account. Some services will even report your rent and utility payments to credit bureaus, helping you establish a positive history.
You can check your credit report for free once a year from each of the three major credit bureaus (Equifax, Experian and TransUnion) through annualcreditreport.com, a site they jointly operate. Many banks also offer free credit monitoring. Review your reports regularly to catch errors and track your progress.
Taking control of your credit score is an investment in your financial future. If you need some guidance to help you build or maintain your credit score, a financial adviser can be a great resource.
After all, the habits you establish today will make borrowing easier and less expensive tomorrow, giving you more flexibility to pursue your goals.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIP
It’s much easier to maintain a good credit score than to rebuild one after it drops. Prevention is far simpler than repair. Taking control of your credit score is an investment in your financial future.
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