As March comes to a close, so does our “Millennial Money Month”. We will close out our series with some information on credit scores that should be useful to adults of all ages.
Here’s how your credit score is calculated, and what you can do to raise it up and keep it there.
Five FICO factors
Credit scores are a mathematic formula that attempts to quantify all of your financial activity, history, and situation into a single number.
There are several different credit scores provided by the various credit bureaus. Some are for special applications (such as auto or homeowners insurance), but most of them are used to judge the creditworthiness of a would-be borrower.
One of the most ubiquitous figures is the “FICO” score, developed by the Fair Isaac Corporation. The factors that comprise your FICO score (and the weight given) are your payment history (35%), the amount of debt you have (30%), the length of your credit history (15%), the type of credit you have (10%), and the amount of new credit you have (10%).
You can obtain your FICO score directly from the various credit bureaus, or by going to MyFICO (www.myfico.com). That site charges about $20 for each bureau’s FICO score you obtain.
Get off on the right foot
Unless you have borrowed money in the past (and promptly paid it back), you may not have as high of a credit score as you would like. So the first step to getting a score is to get a loan or credit card, and then prove you can handle the debt and payments responsibly.
Start by talking to your local bank or credit union to see if they offer a traditional credit card, or perhaps a small ($500 or less) personal loan.
You may need to start with a card that is either co-signed by your parent, or perhaps established by your parent with you on the account, with user privileges.
As soon as you get the use of the credit card or money from the loan, make sure you make at least your minimum payments on time, until the balance is paid off.
You should see your score improve enough to get approved for a loan for a higher dollar amount, or a credit card with a higher limit. Again, make timely payments, and pay the borrowed money back as soon as you possibly can.
Running up the score
A good credit score is a double-edged sword: It allows you to get access to more credit (and at more favorable terms). But if you don’t manage the credit responsibly, it can get you in a money hole, and clobber your credit score.
These healthy credit habits can not only keep your score from falling, but maybe even raise it a few notches:
Make it automatic If possible, arrange to have minimum monthly payments sent automatically from your checking account to those who have loaned you money. You can always (and should eventually) pay down the balance when you have more available cash.
Keep the balances low(er) Try not to charge more than about a third of your credit card’s limit. For example, if you have a card with a $3,000 limit, don’t carry a balance of more than $1,000.
Don’t get cards you don’t need That supposed discount associated with a card issued by, say, a big box retailer usually isn’t worth having one more account showing up on your credit report.
Don’t shuffle your cards Stay with one credit card provider unless you find a much better deal somewhere else. Even then, you may want to keep the original account open as well, even/especially if you won’t charge anything on that account.
We’re taking next week off to handle all of our tax time tasks. But in the meantime, send any money questions you have to [email protected] We can’t answer every question, but if we use yours here your information will remain anonymous.