By: Jessie Conners, The "Apprentice"
Anyone looking for credit has heard the term, “credit score”. What, exactly, does this mean? A credit score is a number that is assigned to an individual that assesses their risk as a borrower at a particular moment. A perfect credit is 850 (and no one really has this) and there is no bottom. The average borrower is at the 660+ range but the higher the score, the better.
The most commonly used score is the FICO score. This derives its name from the software developed by Fair Isaac and Company. Each credit bureau has its own scoring system and name for its system, though. The numbers vary by credit bureau, too. This is why you will hear the term “mid-score”. This is an average score, using information from the various scoring systems out there.
The scores are calculated on the borrowers’ habits. You must have open accounts for a period of at least six months and the information has to be updated within the last six months for the score to be calculated. An open account can be a mortgage, personal loan or vehicle loan, credit card or other accounts of this nature.
These habits include original balance (in the case of a fixed term loan), current balance and payment history. Credit cards have revolving lines of credit with a limit. Using your credit is important, but keeping the open balances on a credit line at half of the available credit or lower is important to keeping the score in a higher, more desirable range. Making payments on time is also critical. Applying for credit often can affect your score negatively.
The two biggest issues that I have experienced in my credit history are acquisition and maintenance. First, acquiring the credit card, and then once receiving this plastic miracle, realizing that a proper payment supervision system must be establish.
These are a few basic tips that I have found useful in my experience with credit.
1. Clean up your Credit- Of course the best way to do this is to first obtain a copy of your credit report. Examining the report does not require a major in economics, you definitely be able to quickly identify the errors. Building or re-building a credit report is not a quick-fix situation. It takes a year or two to complete. Don't fall for promises of a "glowing report in a matter of weeks" from credit repair agencies or other scammers.
2. Get New Credit -Once you've cleaned up your credit, you are ready to start building a positive credit profile. Look for secured credit cards, or for limited credit history apply to stores with small products or traditionally high mark-ups because they will often extend credit to those without much credit history.
3. Keep Your Accounts Active - After you have successfully obtained a few credit lines, make sure to be prudent. Future creditors and loan officers want to see a little interest, so as your accounts remain active it is important to leave a small balance (ex: $50) on the account and pay the minimum payment on time, to demonstrate the ability of your healthy credit management.
The credit score is a living thing. As a person’s life and needs change, so will their score. If you have had financial problems in the past, this will not condemn you to a permanently low credit score. You have the ability to improve your score through proper money management. Speak to one of our Wealth Mentors today by clicking the “Chat Now” button, about how you can improve and maintain your credit score.
