Keeping good credit
Credit Reporting Agency (CRA): a business that maintains information relating to your use of credit in the past and present.
FICO score: a numerical rating used by businesses to determine how much credit risk you pose to them and whether they should extend a loan, lease or job to you.
Installment loan: a financial loan that is repaid over a specified time with a fixed number of periodic, equal-sized payments.
Good credit can make it easier for you to get approved for things like a credit card, a car loan, a mortgage, or even an apartment lease or job. It can also help you qualify for lower interest rates on the money you borrow, which can save you a lot of dollars over the years. So what exactly does "good credit" mean, and how can you get it and hold on to it?
Your credit scores and credit reports are key
Your credit scores indicate how much financial risk you pose to companies thinking of doing business with you. The most widely used credit scores are FICO scores, tabulated by the Fair Isaac Corporation. Everyone has three FICO scores, one from each nationwide credit reporting agency (CRA): Equifax, Experian and TransUnion. A FICO score falls somewhere in the range of 300 points (worst) to 850 points (best).
At each CRA, your FICO score is based on the agency's credit report on you, with the report providing current and past data on your use of credit and your financial reliability. The data is grouped into five categories, and each category is weighted in terms of its relative importance in determining your FICO score. Your payment history counts for 35% of your score; the amounts you owe, 30%; the length of your credit history, 15%; and the types of credit you have in use, 10%.
Stay on top of your scores and reports
Under federal law, every 12 months you're entitled to get a free copy of your credit report from each nationwide CRA. To order a free credit report, go to AnnualCreditReport.com, a site sponsored by Equifax, Experian and TransUnion. According to the Federal Trade Commission, this site is the only authorized source for the free annual credit report available to you by law from each nationwide CRA.
Also, if you're ever denied a credit card or loan, you have the right to get a free report from the CRA used by the lender. Typically, the lender will provide instructions on how to get your report in such an instance.
If you ever find an error on one of your credit reports, you can dispute the error with both the CRA and the business behind the error. You can file a dispute with the CRA online, by phone or by mail; the CRA will notify the other two nationwide agencies and investigate your case within 30 days.
Here's the contact information for each CRA:
|P.O. Box 740241
Atlanta, GA 30374
|P.O. Box 2104
Allen, TX 75013
|P.O. Box 1000
Chester, PA 19022
Your credit reports, however, do not show FICO scores, although you can get your scores separately (and typically for a fee). When ordering one of your reports at AnnualCreditReport.com, look for a link for getting your FICO score from the CRA behind the report you're ordering. You can also purchase any of your FICO scores at myFICO.com.
You should consider checking one of your FICO scores each year, ordering it from a different CRA each time. Also, think about checking at least one of your scores (and perhaps the report it was based on) before applying for a new job or large loan. You can ask the potential employer or lender which CRA it uses in screening applicants.
Checking your scores is an easy way to find out what, if anything, you may need to do to improve your standing and it helps keep you in control of your financial well-being.
Beyond staying on top of your credit reports and scores, there are several more things you can do to get and keep your credit in good shape.
- Pay bills on time. If you've missed payments, try to get current and stay that way. If you’re having cash flow problems, get in touch with your creditors and explain your situation. They might be willing to work on a solution with you.
- Reduce debt. Create and follow a budget as a tool for spending less and paying down debt, focusing first on reducing high-interest credit card balances. Try to keep these balances low compared to your credit limits.
- Try to pay off your credit card balances in full each month. Get into a habit of charging no more than what you can afford and then try to pay off your balances in full each month. This can demonstrate to businesses that you're a good credit risk and improve your FICO scores.
- Keep older credit card accounts open. Older accounts lengthen your credit history, which is good for your FICO scores. Avoid opening a lot of new accounts within a short time frame, because new accounts can lower your scores.
- Maintain a good mix of credit. An assortment of different types of revolving credit, including credit cards and installment loans, can help drive up your scores.
- Limit "hard inquiries" on your credit reports. Whenever a business checks one of your credit reports because you applied for a credit card, loan or other service, a "hard inquiry" is recorded in your files. Too many hard inquiries can harm your FICO scores. A "soft inquiry" occurs when a business checks one of your credit reports for other reasons, such as to decide whether to pre-approve you for a credit card, or when you check your own report. Soft inquiries will not affect your FICO scores.
- If you’ve had credit problems, work on building a new credit history. By opening new accounts and keeping current on the payments, you should eventually be able to raise your scores.
Visit tiaa-cref.org for broader Financial Education, including a variety of resources to help you improve your financial well-being.
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