This three-digit number acts as your financial report card, representing your creditworthiness and an indication to potential lenders of the likelihood that you pay debts on time. If you're a millennial, born in the 1980s and early 1990s, you must start building this indispensable tool of financial adulthood.
Your score, managed wisely, brings you peace of mind and helps put dollars in your pocket via low interest rates and higher credit limits. Managed improperly, your credit score can delay your ability to reach financial goals and result in you spending more to make up for mistakes.
Most lenders rely on reports like those from the Fair Isaac Corp. (FICO). Five elements make up your FICO score:
• 35% depends on how you pay bills – on time or often late or delinquent
• 30% on the amount you owe and the credit available to you
• 15% on the length of your credit history
• 10% on the mix of your credit accounts, including such revolving loan instruments as credit cards and such installment arrangements as mortgages and car loans
• 10% on your new credit applications.
Your FICO score ranges from 300 to 850. The higher the number, the better. Breakdown of credit score ranges vary, but generally:
• 720 to 850: excellent credit
• 690 to 719: good
• 630 to 689: fair
• 580 to 630: poor
• Less than 580: bad credit
Make sure your credit report and score are accurate. Use a website such as annualcreditreport.com or creditkarma.com to obtain your report and look for discrepancies. If you find a problem, immediately contact both the reporting agency and the company portraying the inaccurate information. You likely need more a few calls, letters and emails to update your credit report.
(The Consumer Finance Protection Bureau recently called for changes to make it easier and cheaper for you to access you! r report..)
Monitor your report and check your score at least once a year for both accuracy and potential fraud. If you're a victim of identity theft, enroll in a credit-monitoring service to track your report and send you an alert if changes or suspicious activity occur.
Tips for protecting your report and maintaining a strong score:
• Since how you pay your bills accounts for 35% of your score, pay them on time. Being consistently late or having an account sent to collections definitely hurts your score. This applies not only to credit card accounts but also utilities, retail accounts, installment loans, finance company accounts and mortgages. Note: How recently and how frequently you made late payments matters.
• Ensure that your credit cards carry a low or zero balance. Maxed-out cards translate into a low amount of available credit (meaning lenders think you need to borrow funds to live day to day or you don't track spending closely), and that lowers your score. Closing credit card accounts that have a zero balance and are in good standing doesn't raise your credit score and decreases credit available to you. Understand pros and cons of closing these accounts before cutting up your card.
• Start building your credit now. The longer you display a responsible credit history, the higher your score. If you foresee a problem such as paying a bill late or bouncing a check, give the company or creditor a heads up. You likely establish higher rapport and prevent them from needing to track you down. You may even earn a waiver of any associated fees.
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Mary Beth Storjohann, CFP, is the founder of Workable Wealth in San Diego and is a member of the AdviceIQ Financial Advisors Network, which is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of ! USA TODAY.! Follow her on Twitter at @marybstorj and AdviceIQ at @adviceiq.
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