How to Build Up Your Credit Score So You Can Build Out Your Life
Leisl L. Cording, CFP®
Senior Vice President & Financial Advisor
As a financial advisor, I work with many people in their thirties and forties who are in the “accumulating” phase of life – the time when they’re building their careers, buying a home, building a life for themselves and their young families, and beginning to build up wealth for long-term life goals as well. There’s a lot that goes into creating a solid financial strategy to help achieve all of that, but there’s one thing that can stop those plans at square one: a bad credit score.
It's difficult to imagine functioning in today's world without credit. Whether buying a car or purchasing a home, credit has become an integral part of our everyday lives. Your credit score can even play a role in applying for a job or renting a home. Put all those factors together and it’s easy to see why it’s so important to know how to maintain a positive credit score and credit history.
Whether your credit is pretty good or not so great, taking steps to improve it can help you to reach your financial and life goals much more quickly. Here’s how you can build up your credit as a first step in creating a strong financial plan to build out your life.
Understanding Your Credit Score
Your credit score, often called your FICO score, represents to a lender how likely you are to pay your bills on time. It may determine whether you can get a loan, a job, an apartment, or insurance. A low score may prevent you from obtaining the lowest borrowing rates or the best loan terms.
Your credit score is based on information provided by your creditors to the three credit reporting agencies: Equifax, Experian, and TransUnion. Because each agency may have different information about you, your score may differ slightly among the three.
What affects your credit score? Although judgments, liens, and bankruptcies can have a damaging effect on your score, it is the little things that count. In fact, 65 percent of your FICO score is based on two key factors: your payment history and the amount of debt you carry versus the amount available to you (i.e., your credit card limits). Also important are your length of credit history, how much new credit you have applied for, and your mix among credit types. For more detailed information, visit www.myfico.com/crediteducation.
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Tip #1: Get your score. Although you can get a free credit report once every 12 months through www.annualcreditreport.com, the report does not include your score. You get a free score only if you have been denied credit or insurance. Many lenders will provide your score upon request, after your application has been approved. If you want to know your score before applying, you can pay a small fee to one of the credit reporting agencies or go to www.myfico.com. Offers for free scores are usually tied to monthly credit monitoring services.
Tip #2: Correct your information. It is a good idea to check your credit reports annually to ensure that they are accurate. Correct mistakes immediately, with both the institution and the credit reporting agencies; they have a responsibility to correct errors under the Fair Credit Reporting Act. Be sure to send copies of supporting documentation and keep a record of your request.
Tip #3: Understand your rating. FICO scores range from 300 to 850, with 850 being the best possible score. Generally, a FICO score above 700 is good; scores below 600 indicate a high credit risk.
Tip #4: Know how to improve your score. You can take the following actions to help improve your score: Pay bills on time. Pay down credit card balances. (Reduce the credit card balances you carry to below 35 percent of your available credit limit; 10 percent is ideal – use the paydown calculator on our website at whzwealth.com/financial-calculators for help.) Cut up unnecessary cards but don’t close the accounts. (Because your utilization rate counts as 30 percent of your FICO score, don’t reduce your available credit by closing old accounts. Instead, train yourself not to carry unnecessary cards or cut them up.) Lastly, remember that the trend is your friend – as your credit “blips” recede into the past, your new habits have more weight.
Tip #5: Avoid debt negotiation companies. Don’t be taken in by ads for companies that offer to get you out of debt by negotiating with creditors. You may get a reduction in your credit balance, but not without paying a high price. Moreover, if the company encourages you to walk away from your debt, you will also likely damage your credit score and wind up paying additional taxes. You don’t need a third party to work out a modified repayment plan. Call the number on the back of your credit card, explain your situation, and ask to restructure your payments.
Building and maintaining a favorable credit score is an important step in reaching the goals you’ve set for yourself, your family and your finances, but it’s far from the only one. To have the best chance at achieving your dreams you need a solid financial plan. At Weiss, Hale & Zahansky Strategic Wealth Advisors we help our clients to pursue their goals fearlessly, through our strategic Plan Well, Invest Well, Live Well process. To get started on your personalized strategy for success, contact us at (860) 928-2341 or email@example.com.
Presented by Senior Vice President, Financial Advisor, Leisl L. Cording CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860.928.2341. http://www.whzwealth.com