Credit Basics

April 6, 2012
Your credit score is a very important aspect of your total financial picture and one which you should diligently strive to maintain at a good level or above. It’s a fairly easy equation which normally translates to this: the higher your credit score, the better rates and access to credit you will receive. Since this score can have such a big impact on your financial dealings, you should become familiar with the process that determines your personal score and what you can do to keep it at a good level or even improve it. Below you will find some useful suggestions and strategies to help you with this goal.

What Does My Credit Score Affect?
While knowing your own credit score is certainly important, many people are unaware of the way this score is used by creditors and lenders to determine your creditworthiness. Here is just a sampling of the many ways your credit score impacts your ability to get new or additional credit:
  • Mortgages
    Due to the housing/mortgage crisis of the past few years, mortgage companies have now tightened their lending requirements for potential customers and are generally requiring much larger down-payments. Your credit score will largely determine what interest rate you will be charged and that rate will determine what your monthly payments will be. Those consumers with high credit scores normally will receive much more competitive interest rates and better overall terms for their mortgages. Lenders view low credit scores as an increased risk so they usually assign these customers higher interest rates and increased monthly payments.
  • Auto loans
    Whether you lease or purchase a vehicle, your credit score can greatly impact the terms of your loan agreement. Again, having a high credit score generally means you will get a better percentage rate on your loan which equals lower monthly payments over the life of your loan. Auto loan companies may require a larger down-payment from customers who have lower credit scores.
  • Insurance rates
    Many states are now regulating how much insurance companies can factor in your credit information when determining risk. While your personal driving history and other data are taken into account, most insurance agents do consider your credit score when formulating your rates.
  • Credit cards
    Credit card companies are one group of lenders which generally use your credit score as the major determinant of what interest rate you will be charged and what credit limit you will receive. Many credit card companies deny applicants for any amount of credit simply due to a low credit score or poor credit history. Once again, consumers with high scores will normally receive lower interest rates and higher credit limits.
  • Utility companies
    More and more utility companies are now requiring customers who have a low credit score to put down a deposit in order to receive service. These companies include providers for electric, natural gas, and water services. These deposits can range from $50 to $100+. Consumers with good credit are not subject to this practice.
  • Getting a job
    Many employers require access to a job candidate’s credit score/history to evaluate the stability of a new hire. A person with a good credit history and score is generally regarded as a better option in today’s competitive job market.
Find Your Credit Score
There are many businesses which specialize in helping people find their credit scores. There are several online websites which offer this service also. Before using one of these companies, do some research and make sure they are legitimate. Check with your local Better Business Bureau for more information or contact your State Office of Consumer Affairs to see if there are any complaints about a specific organization. Before choosing a company, be certain there are no hidden fees or subscription services for which you can be charged.

The three main credit bureaus are: Experian, Equifax, and TransUnion. Most companies will give you the results from all three of these credit reporting bureaus. Each bureau uses a different method to calculate your credit score, so it is possible to have a different score from each one. However, all three scores should be fairly close in number. If there is a big discrepancy in one or more scores, you should contact the specific bureau and determine the reason for this. Many times this situation can occur when either inaccurate or outdated credit information has been included in the calculations. It is your right as a consumer to challenge any data which you feel is incorrect.

You are entitled to one free credit report from each of the three major credit bureaus every twelve months. This does not necessarily include your actual credit score. Also, if you are ever denied credit from a lender or credit card company, they are required to give you an explanation in writing telling you the reason for the denial. You can then contact the credit reporting bureaus and request a copy of your credit report. Any time you are denied credit, the reporting agencies are required to give you a copy of your credit report at no charge if you ask them for it.

Currently the average credit score in the U.S. is 680. If your score is higher than average, it will probably be easier for you to obtain new credit with lower rates and better terms. It’s worth the effort to maintain and even improve your personal credit score.

Start Improving Your Credit Score
There’s no better time than the present to work on improving your credit score. Here are some helpful tips to get you started:
  • Pay your bills on time
    One of the biggest factors affecting your credit score is your payment history. If you have many years of consistent, on-time payments to various creditors, you should have a better than average credit score. The best way to improve your credit rating is to always pay your bills on time and pay more than the minimum, if possible.
  • Resolve your outstanding debt
    If you have some glitches in your payment history, it’s always good to re-establish a solid payment schedule as soon as possible with your creditors. Lenders understand that everyone can be dealt a financial setback on occasion. What’s important to them is how you handle your obligations going forward. If you choose to close a specific account, make sure you pay off the entire outstanding balance and let the credit bureaus know that the account was closed at your request.
  • Maintain your credit cards carefully
    It’s very easy to get overwhelmed with credit card debt. The best way to use them is to only charge each month what you can fully pay off when the bill arrives. Try to live on a “cash basis” and only use the credit cards for small purchases which can be paid off easily. Financial experts suggest that you only use about 25% of your available credit. Having many different credit cards all with high balances can severely damage your credit score. Lenders see this as a red flag that you may be in financial trouble and living well beyond your means. Studies have found that people who spend cash for items tend to be more cautious when buying and generally are better at managing their money.
  • Avoid opening too many new credit cards
    It bears repeating- having a lot of credit cards is detrimental to your financial health. Running up charges each month and only paying the minimum to the credit card company can turn into a vicious cycle of more and more debt and even more of your hard-earned money going towards interest payments and late fees. The way to avoid this problem is to simply not apply for new credit. You should know that every time you fill out an application for new credit, either in person or over the phone, the creditor will check your credit report. Each inquiry you have is noted on your report and the more inquiries you have, the more your credit report will be negatively affected.