By Andrew Housser
Your doctor relies on certain numbers like your weight and blood pressure to determine your physical health. Financial institutions, creditors and lenders also look at numbers to help assess your financial health. And the number that interests them most is your credit score.
The credit score is a number between 300 and 850 that is assigned to you by each of the three major credit bureaus -- Equifax, TransUnion and Experian. These institutions base the scores on complex formulas that incorporate data from your credit reports. Each of the three agencies creates a credit report, a detailed listing of your entire debt payment history, including creditors, loan amounts, highest balances, available credit, missed payments, and whether the account is in default, open or closed (and who closed it). A credit score of at least 700 will help assure you obtain the best rates on any loan you take out, and can help in many aspects of your financial life. Here is how to achieve a score in this range.
Don't skip payments. Be sure to make at least minimum payments each month on time. Late or skipped payments are the most common detractors on credit reports, accounting for 35 percent of the score. If you neglect payments for too long and the account goes to collections, your credit score can be negatively affected for up to seven years.
Be smart with your credit. Even if you pay your balances in full each month, racking up big balances can negatively affect your score. Try to limit your charges to 35 percent or less of your available credit (lower is better). If necessary, make periodic payments on the card throughout the month. This will reduce the amount of available credit you are using at any one time. Check with your creditor to make sure that they can properly credit multiple monthly payments.
Focus on paying down credit. Paying off revolving debt, such as credit cards, will significantly improve your credit score. Paying down a few thousand dollars of credit card debt can up your score by as much as 100 points.
Don't over-apply for credit. Cards offering cash back, percentages off of a sale or other rewards are tempting. But applying for too much credit can lower your score. Besides, these types of cards can come with very high interest rates, and the rewards programs often are designed to get you to overspend.
Be careful about closing unused accounts. A positive, long-term history with creditors can boost your score even if the account is inactive and no longer used. If you must close an account, choose the one that was opened most recently. Sometimes issuers close inactive lines. That can hurt your record. You can prevent this from happening by rotating the cards you use and making small charges every six months or so. Be sure to pay these cards off in full each month.
Monitor your credit report. A recent Federal Trade Commission (FTC) study showed that one in five consumers had at least one potentially major error on their credit report. These mistakes can significantly alter credit scores. You are entitled to a free copy of your credit report every 12 months from each of the three major credit bureaus. You can request your reports via Annual Credit Report. Carefully check identifying information, such as your name, address and Social Security number. Make sure all the accounts listed are yours and that the information is correct and current. If you find an error, send a letter via certified mail to the creditor and the credit bureau requesting the item be corrected or removed.
Financial institutions aren't the only ones taking a look at your fiscal health. Potential employers, landlords and even cell phone providers may look at your numbers to determine whether you're a good credit risk. Your credit score factors into almost every major purchase you make. It also is used to determine how much of a down payment you need to make when renting an apartment or turning on utilities. Maintaining good credit will pay off in many ways over many years.
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.