What is a FICO (Credit Score) and How Does it Impact My Life?
A credit or FICO score is a number between 300 and 850. It is a number that lenders use to help them decide whether an individual is likely to repay a loan.
A high FICO score is one of the essential elements to obtaining your “financial freedom”. Interested in finding out how to obtain your financial freedom? Click here.
The higher your credit score is, the more lenders will believe that you will pay them back.
A credit score is used in most large purchase transactions and includes the following (but are not limited to):
- Obtaining a loan for a home
- Financing a vehicle
- Whether an individual needs a cosigner to lease a property
- Signing up for a credit card
Credit scores are calculated based on a grouping of data and are composed of the following 5 categories:
- How much you owe (revolving debt)
- New credit (hard inquiries- how many new accounts or loans have you pulled recently)
- Length of credit history (the amount of time you have been using your credit)
- Payment History (how long you have been positively or negatively using your credit)
- Credit mix (the mix of your current loans i.e. mortgage, student debt, credit cards, etc.)
These five categories may fluctuate in importance depending on the person‘s individual history.
For example, a credit score may be calculated differently for someone who has little credit history versus someone who has a long history of using credit.
4 Things That You Can Do Right Now to Improve Your Credit Score:
- Pay your bills on time-Delinquent payments and collections have a major negative impact on your credit score! Consider setting an alarm on your phone that reminds you every first of the month to review and pay your bills. If the issue is that you are spending too much, then it is time to go on a spending diet.
- Keep the monthly balance on your credit cards to under 30%– The monthly balance is called your “revolving credit or debt.” People with the best credit scores often have very low monthly balances compared to their credit limits.
- Example: If you have a $1,000 credit limit, you should not exceed $300 on your credit card.
- Coming soon in the Eco Economics Increase Your Financial IQ Course: If you are constantly using more than 30% of your credit limit and, then you should consider the following options depending on your situation:
- reduce your spending
- opening another credit card
- increasing your credit limit
- have a maximum of 3 credit cards
- Only apply for and open new credit accounts as needed- The act of applying for a new credit card creates a “hard inquiry”, which stays on your credit for 2 years. Too many hard inquiries can have a negative impact on your credit score. If someone asks to run your credit, you should always ask whether they are running a hard or soft inquiry.
- Soft inquiries do not impact your credit score, whereas hard inquiries can. Usually, hard inquiries are used when applying for a loan of some kind.
- Pay off debt– Pay your debt down, and no… don’t just moving it around.
Understanding the Basics of Credit Scores:
How Do I Get a Credit Card If I Have No Credit History:
This is the typical chicken versus the egg situation. You need credit history to apply for a credit card, but can’t build up your credit history without a credit card.
Solution: Apply for a joint credit card with a parent or someone who already has an established credit history. Be sure that the person you are obtaining a joint card with is fiscally responsible.
Tip: The best situation would be for you to be the only person who is using and paying the credit card.
***Remember that both parties are responsible for paying the card (should one party decide to default on the payments). This means that if a parent decides to cosign on a credit card with their child, they should set a low credit limit and request overdraft protection.
- Coming soon in the Eco Economics Increase Your Financial IQ Course: Tips and tricks on how to establish your child’s credit history. Your kids will learn how to balance a checkbook and slowly transition them into using a credit card responsibly.
I recommend that they establish credit while they are in high school, and then can feasibly apply for their own credit card when they go off to college.
This program will teach them to manage their credit so that when they leave the house you will have the confidence (after having watched them use their credit over several years), that they will use their credit responsibly.
Take Action by Monitoring Your Credit:
The best advice for building or rebuilding credit is to manage it responsibly over time. You are entitled to 1 free report from each of the 3 major credit bureaus (Equifax, TransUnion, and Experian) each year.
There are many websites that allow you to track your credit, and produce a monthly report so that you can monitor for fraud.
Often times they give new customers a free trial period. Credit Karma is one such company.
What to Do if you Believe Someone Has Stolen Your Identity:
Do you have a specific question about how to rebuild or use credit? If so comment below and sign up to receive information on how to increase your financial IQ!