Know Your Numbers - and Save!

What do the following numbers have in common: your age, your weight, your annual income? All these numbers have some effect on your life.  All are numbers that you think about quite a bit. All are numbers that you may wish were different.

There’s another number that impacts your life a great deal. You probably don’t think about it as much. In fact, many people don’t even know what this number is until they realize that they need to change it. We’re talking about your credit score. 

Your credit score is a 3-digit number that ranges from 300 to 850. It determines whether you are able to obtain a mortgage, an auto loan, or a credit card, as well as your interest rates.  It can also be used when you rent or apply for a job. The most commonly used measure of credit is the FICO score, because of the method of calculation used.

What determines your credit score?

• Payment history: Late payments or accounts that went to collection agencies can dramatically drop your credit score. For future homeowners, it is vital to ensure that bills are paid on time. If this is difficult to remember, consider setting up automatic payments.

• Debt ratio:  How much you owe compared with how much credit you have available accounts for a large percentage (around thirty percent) of your credit score. Reducing your credit limit or maxing out your cards can lower your score.

• Length of credit history: Obviously, if you have a longer credit history, during which you have been responsible with your credit, your score will be higher.

• Types of accounts: You want to have a good mix of installment loans and revolving credit.

• New accounts and inquiries: Applying for new credit will lower your score, as the assumption is that you will potentially be acquiring new debt. When preparing to obtain a mortgage, it is wise to decline all offers for new credit cards or other forms of credit. 

Generally, scores above 800 are considered excellent; scores above 760 will also get very good interest rates.  Below 600 is considered very poor. On a $150,000 mortgage, the difference between a poor and a very good score can make on your monthly payment is around $150. 

Now that you understand what your credit score means, it’s a good idea to start keeping an eye on it. You are entitled to receive a free credit report from each of the three credit reporting agencies. Your credit score itself will not be provided for free, but keeping an eye on your report is important. Mistakes are sometimes made, but can be remedied before any damage occurs. As scores will vary from each reporting agency and over time, it is not necessary to obsess over the actual number. By fixing mistakes and identifying areas in need of improvement, you can raise your score and get the best possible rate on your next mortgage!