Want to Take Advantage of Low Rates? Know Your Credit Score
By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management October 29, 2012 09:30 AM
With interest rates at historic lows, many folks are looking to purchase homes, refinance existing mortgages and buy new cars. But whatever your reason for borrowing, you should probably first check your credit history and credit score.
How can you figure out where you stand--and what does it take to appear more creditworthy? While some of the finer details of credit scoring aren't disclosed by the companies involved, the whole process is less mysterious than you might imagine.
Every year, the three major credit bureaus, Equifax, Experian and TransUnion, are required by law to provide consumers with a free copy of their credit report. The three bureaus offer these free reports through a special website, www.annualcreditreport.com. A credit report doesn't include information on income or wealth. Rather, it provides details on the various bills we deal with each month, including our mortgage, credit cards and whether we have ever been late making payments. It's important to make sure everything is accurate because this information is used to compute your credit score.
There's a variety of different credit-scoring systems, but the most popular is the FICO score developed by Fair Isaac Corp. FICO scores range from 300 to 850, with the typical score falling in the low 700s. The higher your score is, the better.
If you want to maintain a good credit score, your top priority should be paying your mortgage, credit cards, car loans and other bills on time. In addition, you should strive to keep your credit-card balances low, especially relative to the credit limits on your cards. Even if you pay off your cards in full every month, you should endeavor to use no more than 20% or 30% of the available credit. You can also hurt your credit score by applying for credit too often. And don't be too quick to cancel old credit cards. By getting rid of old cards, you will reduce your available credit and that may make it appear like you're using an uncomfortably high percentage of your remaining credit.
For more information on how credit scores are calculated, visit www.myfico.com and for more insights from Jonathan Clements, click here.
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