For many people, the words “credit score” cause anxiety. Credit scores are associated with judgment, risk and debt – so many consumers would rather not think about them.
But reviewing your score on a regular basis can be important for your financial health: consumers who have a good idea of their credit score are more ready when they need to borrow money for a major life purchase like a new house or car.
In addition, consumers who regularly check their credit reports are more likely to catch identity theft before it becomes a major problem. An unusual change in your report can be an early indicator. If you spot credit inquiries that you don’t recognize, you can catch a potential fraudulent new account before it’s even opened.
There are several components to determining a credit score, many of which you can manage with some careful planning. Here are some tips to help you:
Check your reports annually.
Consumers are entitled to receive a free copy of their credit report from all three reporting agencies once every 12 months. To request a copy, visit the authorized website – AnnualCreditReport.com – or call 877-322-8228. You will have to provide your address, Social Security number, and birth date to receive the reports. When reviewing your credit reports, you should keep an eye out for any account activity you don’t recognize, and call the creditor immediately with your concerns. The report will also serve as an indicator of your borrowing habits.
Be wise about opening and closing accounts.
Before opening or closing a credit account, think about how it might affect your credit score. While it positively affects credit scores to have a wide array of accounts – such as credit cards, personal loans, home equity lines of credit, etc. – it can be harmful to your score to open more lines of credit than you can manage. Opening new lines of credit can also drag down your credit age, which indicates to lenders how long you have had experience with credit.
Make on-time payments.
Your payment history, or how reliably you make on-time payments, is the most important factor in calculating your credit score. This information indicates to potential lenders how likely you are to pay them back should they choose to lend to you. To avoid missing deadlines, consider using automatic bill payments or setting up alerts.
Optimize your credit utilization ratio.
Your credit utilization ratio is your debt-to-limit ratio; it measures the amount of credit you are using compared to what you have available. High credit utilization ratios may cause potential lenders to think you’re overextended and unlikely to make timely payments on future debts.
If you see something on your report that you don’t recognize, don’t assume it should be there. Contact both the credit reporting company and the organization or company that provided the information (that would be your lender or credit card company). The Federal Trade Commission recommends sending a hand-written letter with copies of all relevant documents via certified mail.
Your credit score can play an important role in your personal finances and can greatly impact your borrowing power, so it needs to be managed accordingly. Following these basic steps can keep you feeling informed, confident and financially secure.