A new year means you should keep tabs on your credit history (reports and scores).
As the new year unfolds, they’ll be many things on your mind. Will the economy worsen? Will President Obama offer a huge stimulus package? How bad is the job market likely to be in 2009?
Those questions cannot be answered in advance, it’ll take the better part of the year to find out what direction our country is headed. Other forces such as a regional war, natural calamity, terrorist attack or some unforeseen problem may also loom large, events which can shake the world to its very core. Clearly, gloominess is pervasive and there isn’t a whole lot we can do about it.
On a personal level, one area where you have at least some control is your credit. Specifically, your credit reports and your credit score. If you don’t already do it, you can obtain free copies of your credit reports from Equifax, Experian, and TransUnion once annually. A government mandated website has been set up where you can gain access to these reports at www.annualcreditreport.com. Get your copies, review your reports and correct whatever errors you find.
Your credit score, which is separate (and will cost you a fee ranging from $5 to $8) is derived from your credit reports so if you’re planning to apply for credit at some point during 2009, you’ll want to make sure your reports are in order. Remember: the higher your credit score, the more likely you’ll receive a loan and obtain a favorable interest rate and other loan terms.
What Goes Into Your Credit Score
Knowing what goes into building your credit score goes a long way to helping you understand how your credit score is calculated. Quite simply, there are five components to your score weighted as follows:
Payment History (35%) — Lenders who report their information to at least one of the three credit reporting agencies let them know whether you pay on time or not. Late payments can work against you, weighing in as a significant chunk of your credit score.
Credit Limits (30%) — Large balances on credit lines (credit cards, equity loans, etc.) can reduce your score. The higher the balance, the lower the score.
Credit History (15%) — The longer you have had credit, the better for you. Specifically, if you have loans and lines of credit dating back for many years, that information is beneficial to creditors when they decide whether to lend to you, for how long, and at what interest rate.
New Credit (10%) — Recently opened accounts can actually work against you. If you apply and receive several new credit cards in a short period of time, then your score will be lower.
Types of Credit (10%) — What kinds of outstanding loans do you have? That mixture which could include credit cards, cash advances, students loans, an auto loan, a home mortgage, etc. can also impact your credit score.
The total number for your credit score is known as your FICO (Fair Isaac Corporation) score and it’ll range between 300 and 850. Though your social security number is one of the most important numbers you have, your FICO score is too as it can impact your lifestyle as you seek to buy a new car, pay for college, buy a home, etc.
As mentioned, you cannot control the big picture (national and global events) but by getting copies of your credit reports and obtaining your credit score, you can take care of personal business – an excellent resolution for the new year!
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