If you've been paying attention to recent developments in the credit world, you know that you can now obtain a free credit report from one of the three credit reporting organizations: Experian, TransUnion, and Equifax. You still need to pay to get your FICO score, but for about $25, you'll have the single most important piece of information already in the files of your creditors and lenders.
There is no time like the present to check your credit, especially if it's been a while. Think of it as an annual exam for your financial well being. It's easy to forget about. If you pay your bills and no one is contacting you, everything should be fine. However, with the growing epidemic of ID theft and the headaches that causes, it's wise to keep a close eye on your credit rating as well as your bank and charge card balances. Another good reason to check your credit rating periodically is to make sure each account is in good standing. Mistakes are inevitable, so the earlier you catch and correct them, the less damage will be done.
If you haven't checked it in a while, the number of accounts that are open may be an eye opener. A free report through Experian, for example, shows a summary of your current balances for the date it is requested. Categories include real estate accounts for mortgages, revolving accounts like department store credit cards, and installment accounts for student and auto loans. Unless you close an account, it remains active on your record regardless of the last time you used it.
Fair, Isaac & Co.—FICO for short—produces statistical analyses for individuals and businesses so they can make informed financial decisions. In this case, FICO calculates the statistical probability that you will pay your creditors what you owe on time and renders the entire set of variables as a single number. That number, which typically ranges from 350 to 850, determines whether you'll receive credit when you want it and on what terms. Your FICO score spells out simply to prospective lenders what the probability of risk is to them and—for mortgages at least—may influence the interest rate. The better your FICO score, the better your mortgage interest rate is likely to be.
FICO examines dozens of variables and weights your credit reliability according the following:
Your credit score is color blind, and doesn't include age (though at least to some extent account longevity implies some type of maturity), location, salary, occupation, or any other personal information. It also doesn't include requests you've made, inquiries made to promote credit offers (all those credit offers you get in the mail), or prospective employers.
The biggest advantage to FICO scoring from a consumer point of view is that it's statistical. If you can manage the factors that go in to your score, you can optimize it through careful credit management and understanding the way FICO works.
If you are planning to buy a home, change jobs, or make other major changes, get your credit scores and plan accordingly. Your FICO score favors stability, consistency, and reliability. You can improve your score by paying down existing debt and reducing the proportion you owe on different types of loans.
Don't do everything at once. If you are planning to change jobs, wait a while before buying a new home. And avoid closing accounts. Strange as that sounds, keeping accounts open, even when you haven't used them in ages, provides longevity to your FICO picture.
The following tips will help you stay on top of your financial game.
myFICO —lots of interesting detail on what comprises your credit score, FAQs, tips, and a range of helpful financial calculators.
Your Money or Your Life —Think about your life and your money. How much is enough? And what do you really want to do anyway? Just learning to watch what comes in and goes out is worth the cost of this book.
Looking for a mortgage lender? DiamondPeak Mortgage can help.