Credit check.

When someone asks you about your credit, you probably think about your score. For a lot of people, having a good credit score is a badge of honor. But what actually goes into your credit score, why do we care about it, and what should we actually be looking out for?

 

A credit score tells lenders how worthy someone is of borrowing money and how likely the borrower is to repay the lender based on their track-record. Having a good credit score means you are more likely to obtain a loan as well as more favorable interest rates. The most well-known credit scoring system is called FICO. FICO scores range from a low end of 300 to a high end of 850. FICO credit scores consider the following factors to determine a FICO credit score:

 

1.     An individual’s payment history makes up 35% of the total FICO score. The history looks to whether payments are made on-time, how often they are late, and on the number of the accounts they are made on-time or late.

2.     Amounts owed makes up 30% of the FICO score. This factor is regarding the balance on each debt owed. A credit score is reduced if an individual has more than 30 percent of a credit limit borrowed on any account. The goal is to shoot for a balance between utilized and maximized.

3.     How long you have had credit composes 15% of the FICO score. 

4.     Are you borrowing more money? Recent credit inquiries and new accounts opened can have a negative impact on your credit. The impact on the overall FICO score is 10%.

5.     What types of credit do you use? This factor analyzes whether the credit you use is for its intended purpose and whether you have a good mix of credit. This factor has an impact of 10% on the overall FICO score.

 

If you use credit cards, your creditor likely has a feature to tell you your credit score and how you fare in each of the factors listed above. However, a credit score cannot tell you whether you have any delinquent accounts or if there is any fraud on your credit report. For this reason, it is even more important to check your credit report regularly.

 

A credit report is a compilation of data from merchants, utility companies, banks, court records, and creditors about your payment history. A credit report is created by one of the three credit bureaus: TransUnion, Equifax, and Experian. Fortunately, you can review your credit report, for free, from these credit bureaus up to three times per year. Checking your credit report yourself will not affect your score.

 

When reviewing your credit report, confirm all accounts that appear on your report are yours. This means that you took them out and you are aware of them. If you find an error, you have the right to challenge the error. Aside from checking for accuracy, make sure there are not any open accounts that you have forgotten about or that you don’t wish to have open. If there are any open account with a balance you forgot about, be sure to add it to your debt list.  Your credit report is a valuable tool to get a holistic view of your credit picture.

 

To obtain your free credit report, visit www.annualcreditreport.com. You are entitled to one free report from each of the credit bureaus each year (TransUnion, Equifax, and Experian). If you wish to check your credit more than once per year, simply request from one of the bureaus at a time and space them out. For example, if I wanted to check my credit today and two more times this year, I would select TransUnion’s report today, and in four months, Equifax’s, and again in four months, Experian’s.

 

Sometimes it can be scary to gather this information. It can be more comfortable to bury our head in the sand then to confront our history. One of the most important aspects of having a good financial plan is to have as much information as is available to you. Gathering your credit history and making sure it is accurate only helps on that path.

 

Best of luck!  

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