Your fico score is your adult report card.
Bernard B.
November 11, 2008
A couple of weeks ago, I heard a radio show host refer to your fico score as your "Adult Report Card". It's true. It's a trust meter on how well you handle borrowed money.
The fico score has been depicted as some sort of enigma. We know it's a number that determines your interest rates but I think that's as far as some people take it.
What you should realize is that your credit score can dramatically affect your wealth. It factors your interest rate, rate of return, and financing options.
So let's explore:
Why is it important?
What are some misconceptions?
What can lower it?
And most of all, how can you raise it and maintain it?
Why is it important?
Your fico (Fair Isaac Company) score is a ranking on your ability to pay back borrowed money. The higher the number, the better. Since this number determines your interest rates, it is important is because a lower score can erode a lot of your wealth.
Some think that having no credit at all is better. It isn't.
No credit is almost as bad as bad credit.
If you think about it, who would you trust more with your new car? Would you rather have someone with a bad driving record or someone that has never driven at all? They're almost equally as bad.
What are some misconceptions?
What can lower it?
How can you raise it and maintain it?
10 months ago, my wife's credit score was 762 and mine was 750. And the answer is yes, my wife does hold that over my head.
But the magic number for your fico score is 720. I'm not sure why, but that's the number that lenders view as capable of getting the best rates. There's no reason to work for a higher number.
This is your adult report card. Make 720 your goal. Run your report.
Check if you're passing...or failing.
Extra Credit
Here's some extra credit for those of you who want to look better on your report card.
1. Automate your bills.
You don't have to carry three credit cards in your wallet and rotate charges to keep them active. Set up some bills to be paid with the card (i.e. phone bill, cable bill, etc.) They can be as small as you want.
Then at the end of the month, be sure to pay the balances on those cards. Use online banking to automate this process.
2. Add your child as an authorized user.
There's not a better time to teach your child how to use a credit card than when they're young. Have them added as an authorized user so they can start building their credit history along with you.
Teach them the importance of being responsible with their fico score, paying their bills on time, and other productive ways to use a credit card.
(And tell them that a t-shirt is not worth a credit card in college.)
3. Deepen individual roots.
If your spouse needs to rebuild his/her credit, put the car loan under his/her name. Establish your partner as a standalone borrower. Having good credit between the both of you can increase your productivity by having the ability to use either fico score when investment opportunities arise.
Discover your financial freedom resources.
Visit us at Choose Financial Freedom.
The fico score has been depicted as some sort of enigma. We know it's a number that determines your interest rates but I think that's as far as some people take it.
What you should realize is that your credit score can dramatically affect your wealth. It factors your interest rate, rate of return, and financing options.
So let's explore:
Why is it important?
What are some misconceptions?
What can lower it?
And most of all, how can you raise it and maintain it?
Why is it important?
Your fico (Fair Isaac Company) score is a ranking on your ability to pay back borrowed money. The higher the number, the better. Since this number determines your interest rates, it is important is because a lower score can erode a lot of your wealth.
Some think that having no credit at all is better. It isn't.
No credit is almost as bad as bad credit.
If you think about it, who would you trust more with your new car? Would you rather have someone with a bad driving record or someone that has never driven at all? They're almost equally as bad.
What are some misconceptions?
- You can raise your score by lowering your credit availability.
Lowering your credit availability can have the opposite affect of what this strategy intends.
When your credit report is pulled, it is a snapshot of a point in time. What we have have learned is that you do not want your balance on a credit line to exceed 30% of its availability.
For example, if your credit availability is $10,000, try to keep your balance below $3,000.
What if I pay my bills on time?-
It doesn't matter since this report is a snapshot in time. Your report does not say you pay your bills on time. It will say you are a high risk if your balance happens to be close to your credit availability.
Also, having high available credit will not lower your grade. As you can see, it could actually help your score.
- Having a balance on your card improves your credit.
I initially heard this from a friend when I was in college. But this advice holds no merit. My wife and I pay off our balances every month and our fico scores are high.
This should be good news! Not carrying a balance means that you don't have to pay interest when you don't want to. Who do you think started this rumor that carrying a balance is good? I have some guesses.
- Requesting a credit report will hurt your score.
This depends. When you make a hard inquiry, your score can be affected, but only by a few points. A hard inquiry is made when you are actively seeking credit (i.e. a new credit card).
But, if you make multiple hard inquiries for a car loan within 45 days, those will only count as one inquiry.
A soft inquiry can be made to get an approximate figure of what your score is. Our Prepaid Legal Membership performs soft inquiries every month to investigate any unusual occurrences on our credit report. These don't hurt your score because you aren't applying for credit.
What can lower it?
- Not paying your bills on time.
Some of you may be thinking...duh. But, you'd be surprised. If it was so apparent, everyone would have great credit right? We know that's not the case today.
So here's a habit you can work on: Pay your bills on time! If you can't pay a bill on time, then maybe it shouldn't be a bill.
- Closing credit card accounts.
Your credit cards have history. I've heard it referred to as roots. So, the longer you have a credit card, the deeper the roots. If you close a credit card account that you don't use, you uproot that history.
If you have good credit history with a particular card, then you'd really want to keep it. Also, closing a credit card decreases your credit availability that it carried.
- Transferring balances.
We were taught that transferring balances between cards has an adverse affect on your fico score. To the credit card companies, it just looks like you're moving these balances.
They're probably right.
How can you raise it and maintain it?
- Run your credit report.
This should be done first. You need to establish a baseline. You need to know where you are now in order to get to where you want to be.
I heard that 80% of credit reports have an error on them. This erroneous data can be bringing down your score, causing you to pay more interest. What you don't know can hurt you.
There are some online resources where you can get a free credit report. Take advantage of them.
- Have 2-3 active credit cards.
I'm talking about major credit cards like American Express, MasterCard, Visa, and Discover. If you have retail cards like Nordstrom and Best Buy, I would suggest closing them. Oh yeah, pay the balances first.
If you don't have enough cards, open some up. It will lower your fico score initially because you are applying for credit. But, they will help in the long run because you are working to deepen those roots.
- Increase your credit availability.
Call you credit card companies to increase the credit availability on your cards. You don't want your balance on any card to exceed 30% of its availability. Don't max out your credit cards!
And remember, your credit cards are a backup resource for emergencies. The greater the availability, the greater the resource.
10 months ago, my wife's credit score was 762 and mine was 750. And the answer is yes, my wife does hold that over my head.
But the magic number for your fico score is 720. I'm not sure why, but that's the number that lenders view as capable of getting the best rates. There's no reason to work for a higher number.
This is your adult report card. Make 720 your goal. Run your report.
Check if you're passing...or failing.
Extra Credit
Here's some extra credit for those of you who want to look better on your report card.
1. Automate your bills.
You don't have to carry three credit cards in your wallet and rotate charges to keep them active. Set up some bills to be paid with the card (i.e. phone bill, cable bill, etc.) They can be as small as you want.
Then at the end of the month, be sure to pay the balances on those cards. Use online banking to automate this process.
2. Add your child as an authorized user.
There's not a better time to teach your child how to use a credit card than when they're young. Have them added as an authorized user so they can start building their credit history along with you.
Teach them the importance of being responsible with their fico score, paying their bills on time, and other productive ways to use a credit card.
(And tell them that a t-shirt is not worth a credit card in college.)
3. Deepen individual roots.
If your spouse needs to rebuild his/her credit, put the car loan under his/her name. Establish your partner as a standalone borrower. Having good credit between the both of you can increase your productivity by having the ability to use either fico score when investment opportunities arise.
Discover your financial freedom resources.
Visit us at Choose Financial Freedom.
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