Your Credit Score…A Valuable Asset…Protect It!

In this era of people tightening their belts, pulling back on many purchases, and the occassional missed payment, credit scores can be severely bruised.   A credit score can impact  many facets of life, from obtaining the job since many companies now look at credit scores as a component of evaluating risk, to getting the best rates for insurance policies.  

Naturally credit scores impact the amount you pay for credit;  the price of a interest on a mortgage, the price of interest on a car, or any loan at a financial insittution.   The best credit terms used to go to people with a score of 720 or better, but now lenders look at scores of 740.  

The law states that consumers are entitled to one free credit report which can be obtained from

           http://www.annualcreditreport.com

There is no charge for this report.  This is not the advertized site seen and heard on television and radio and in print media which is not the government sanctioned web site.  According to the U.S. Public Interest Research Group, approximately 70% of credit reports studied “contain errors of some kind” said Patrick Ritchie, author of The Credit Report Map.

Obtaining a credit report and keeping the credit report over a period of years to use as the basis of comparision is wise.  When disputing errors in the report, previous credit reports can be used as referral tools.  The Fair Credit Billing Act (FCBA) and the Electronic Funds Transfer Act (EFTA) set procedure for consumers to dispute items on the credit report.

The three main credit scoring agencies are Equifax, TransUnion, and Experian.   They take information from creditors regarding payment history of debt, balances, payments, high credit, as well as data from the public records.

Credit score components are 35% pyament history; 30% amount owed; 10% inquiries and new debt; 10% types of credit; and 15% length of history.  It is wise not to cancel a credit card, especially if it has been in use for a long period of time, since it will influence the length of history component. 

The three credit agencies give higher scores to people who keep credit card debt less than 50% of the maximum credit allowed, regardless of payment history.   It is better to have five credit cards with a $5,000 limit each carrying balances of $1,000 each (20% of the maximum allowable amount) than one card with a $10,000 limit carrying a balance of $5,000 (50% of the allowable maximum debt).   The amount owed is the same, but the scenario is viewed differently;  the assumption is made (accurately or inaccurately) that the person carrying the five cards manages debt better than the person carrying one card. 

It is also important to periodically use all credit cards, even if for a small $5.00 payment or for a monthly bill like Netflix or the gym.  This is construed as good money management.  If in a financial squeeze, at least make the minimum payment on every card, rather than trying to make a larger payment on one card at the expense of the others. 

Tomorrow:  More about Credit Scores

Resources: 

http://www.TheCreditRoadMap.com     –  Patrick Ritchie

Federal Credit Reporting Act:   http://www.ftc.gov/os/statutes/031224cra.pdf

The Credit Report – http://www.annualcreditreport.com

Equifax   http;//www.equifax.com

TransUnion  http://www.tuc.com

Experian   http://www.experian.com

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2 Responses to “Your Credit Score…A Valuable Asset…Protect It!”

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