Inside Numbers You May Not Have Known in Managing Your Credit Score - Especially FICO - Great Advice!
Feb 28, 2017 11:53:15 #
Marc A. Hebert's Money Sense: It's important to understand and manage your credit score
By MARC A. HEBERT
YOU HEAR ABOUT the importance of knowing your credit score on television ads. You can get a free credit report from each credit reporting agency once a year. So what is the difference?
A credit report summarizes your financial reliability. It is information compiled from a number of sources, including lenders, utility companies and landlords. These sources not only give information to the credit reporting agencies, but can use the information available from the agency to decide to lend you money, rent you space, or even employ you.
It is a history of how you pay your debts. It will include such things as the type of accounts you have, any collection efforts, the age of your debts, if anyone has received your credit report, and when you have applied for a loan.
Because knowing what is in your credit report is so important, you are entitled to one free copy of your report every 12 months from each of the three nationwide credit reporting agencies. To obtain yours, go to the website www.AnnualCreditReport.com. Once you obtain the report, make certain the information is free of errors. I suggest you spread out getting a report from each agency, one every four months.
A credit score is a numerical value calculated from the information contained in your credit report by a credit reporting agency using a complex and proprietary mathematical algorithm. This is a number used to help access your "credit risk."
While there are many credit-scoring formulas, FICO is the most widely known and used. It is an acronym for its creators, the Fair Isaac Corporation. According to myFICO.com, 90 percent of the top lenders use FICO scores when making lending decisions. A typical credit score will range between 300 and 850 points. Each lender will make decisions based on your score. A higher credit score is perceived as a more attractive risk to the lender. It generally translates into better terms and money saved over time.
As an example, currently, a borrower with a credit score between 760 and 850 might expect to obtain a rate of 3.174 percent on a 30-year, $200,000 fixed-rate mortgage. This results in a monthly payment of $859.82. By contrast, an individual with a score of between 620 and 639 can expect a rate of 4.763 percent for the same loan. This change in interest rates results in a payment of $1,040.73, an extra $180.91 in the monthly payment amount and an additional $65,128 in total interest paid over the life of the mortgage.
As your credit score is an important part of your financial picture, here are the general components and the percentage of the score they represent.
Paying on time (35 percent). Payment history is important, and paying on time shows you use your credit responsibly.
Credit utilization (30 percent). This is the total debt you have divided by the total credit available. If you use too much of the available debt, it could signal a credit risk
Length of credit history (15 percent). The average age of your credit cards is a sign of how long a credit history you have. Old accounts should be maintained carefully.
New credit (10 percent). It could be unimportant to you, but opening several credit cards in a short time isn't good for your credit score. To lenders, this could be a warning sign that something isn't quite right in your financial life.
Mix of credit accounts (10 percent). A healthy mix of credit cards, charge cards, installment loans and mortgages has an impact on your score.
By managing each component of the score well, and checking your credit report periodically, you should be well on your way to having great credit.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.
- See more at: http://www.newhampshire.com/article/20170226/NEWS0207/170229535/-1/mobile#sthash.U8QPOMXr.dpuf
By MARC A. HEBERT
YOU HEAR ABOUT the importance of knowing your credit score on television ads. You can get a free credit report from each credit reporting agency once a year. So what is the difference?
A credit report summarizes your financial reliability. It is information compiled from a number of sources, including lenders, utility companies and landlords. These sources not only give information to the credit reporting agencies, but can use the information available from the agency to decide to lend you money, rent you space, or even employ you.
It is a history of how you pay your debts. It will include such things as the type of accounts you have, any collection efforts, the age of your debts, if anyone has received your credit report, and when you have applied for a loan.
Because knowing what is in your credit report is so important, you are entitled to one free copy of your report every 12 months from each of the three nationwide credit reporting agencies. To obtain yours, go to the website www.AnnualCreditReport.com. Once you obtain the report, make certain the information is free of errors. I suggest you spread out getting a report from each agency, one every four months.
A credit score is a numerical value calculated from the information contained in your credit report by a credit reporting agency using a complex and proprietary mathematical algorithm. This is a number used to help access your "credit risk."
While there are many credit-scoring formulas, FICO is the most widely known and used. It is an acronym for its creators, the Fair Isaac Corporation. According to myFICO.com, 90 percent of the top lenders use FICO scores when making lending decisions. A typical credit score will range between 300 and 850 points. Each lender will make decisions based on your score. A higher credit score is perceived as a more attractive risk to the lender. It generally translates into better terms and money saved over time.
As an example, currently, a borrower with a credit score between 760 and 850 might expect to obtain a rate of 3.174 percent on a 30-year, $200,000 fixed-rate mortgage. This results in a monthly payment of $859.82. By contrast, an individual with a score of between 620 and 639 can expect a rate of 4.763 percent for the same loan. This change in interest rates results in a payment of $1,040.73, an extra $180.91 in the monthly payment amount and an additional $65,128 in total interest paid over the life of the mortgage.
As your credit score is an important part of your financial picture, here are the general components and the percentage of the score they represent.
Paying on time (35 percent). Payment history is important, and paying on time shows you use your credit responsibly.
Credit utilization (30 percent). This is the total debt you have divided by the total credit available. If you use too much of the available debt, it could signal a credit risk
Length of credit history (15 percent). The average age of your credit cards is a sign of how long a credit history you have. Old accounts should be maintained carefully.
New credit (10 percent). It could be unimportant to you, but opening several credit cards in a short time isn't good for your credit score. To lenders, this could be a warning sign that something isn't quite right in your financial life.
Mix of credit accounts (10 percent). A healthy mix of credit cards, charge cards, installment loans and mortgages has an impact on your score.
By managing each component of the score well, and checking your credit report periodically, you should be well on your way to having great credit.
Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.
- See more at: http://www.newhampshire.com/article/20170226/NEWS0207/170229535/-1/mobile#sthash.U8QPOMXr.dpuf
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