Boy Meets Girl!

Imagine, if you will, a romantic dinner at an upscale restaurant. A man and a woman gaze deep into each other’s eyes as soft music plays in the background. The man leans over and passes a small box across the table, looking deep into his love’s eyes. Sheepishly, he asks, “Will you marry me?" The woman, obviously touched by the gesture, opens the box with a gasp. She begins her response and pauses, thinks for a moment, and states, “One quick question. What is your credit score?”

Sound unbelievable? Maybe. But this example illustrates just how important the credit score has become to people planning their financial future.

As a culture we are obsessed with our credit scores!

Reminders of our credit scores are everywhere. Television, radio, Internet and print advertising are dominated by companies with services devoted to helping you get credit, repair credit, counsel your credit, and protect your credit. If it’s this important in our world, it means everyone had better know a little something about it. READ ON!

So what is a credit score?

Your credit score has five key components. The two most important are your bill payment history and your account balances. In other words, how much debt you have, account balances, and whether or not you pay your bills on time, bill payment history. The other three items are length of credit accounts, new accounts, and types of credit accounts. Credit bureaus look at how established your credit is and whether you have been looking into lines of credit recently. In addition, they want to see how you are using your credit. Taking out four car loans will have a negative impact on the creditor's assessment compared to, say, two credit cards, a home mortgage, and a car loan.
All the above-mentioned data is compiled, weighted, and calculated to give the credit bureaus a credit score. These scores range from 500 to 850, with 850 being the highest or best possible credit score.

What does my credit score mean?

Your credit score determines two very important aspects of your financial life. First, the maximum amount of money you are loaned, or your credit limit, and second, the interest rate assessed to your accounts. With a low score, you may only be given a credit limit of a couple of hundred dollars. On the other hand, if you have a high score, in the 700s for example, you likely would be given a credit limit in the thousands of dollars. Probably the most crucial factors when it comes to calculating your credit score is your interest rate. Interest rates are extremely important! You are being allowed the privilege to borrow money, but it is not free. Interest is the cost of borrowing money. The interest rate is how much you will have to pay back to the lender. If the interest rate is too high (if you have a low credit score, it will be high) you should consider the effect of borrowing. Individuals with good credit scores are rewarded with low interest rates because they are less of a financial risk for the lender.

Who are the credit bureaus?

There are three credit bureaus: Experian, Equifax, and TransUnion. These three companies gather credit data from individuals and compile that data to determine a credit score for the individual. All three companies assess credit data differently, so the credit scores will vary. These companies then sell your credit score to potential lenders. The contact information for the three bureaus is given below. It is important to keep an eye on your credit score throughout the year. All three are required to share your credit score once a year. Take advantage of it. If there is an inaccurate item, correct it immediately!

How do I acquire a good credit score?

First, pay your bills on time! Be a good borrower. Second, only keep the credit cards you need. Next, regularly use the credit cards you do have, but pay them off! It is also important to keep your bank record spotless. An insufficient funds tag from your bank will be reported and will affect your credit score. Time is important. When creditors look at your credit history, someone who has been given credit for several years is viewed more favorably by lenders, especially when everything is paid on time. If you are working to establish credit, don’t try to do it all at once. Open accounts one at a time and keep them manageable.

How did I end up with a bad credit score?

You may want to look at how much you collectively owe. This, in conjunction with your income, is called your debt ratio. The higher your debt versus income, the more of a risk you appear to be. Having several recently opened accounts will also create a negative perception. Delinquent accounts are big hits to a credit score. If you have insufficient funds, or high balances on credit cards, you will be considered delinquent and delinquencies can negatively affect your credit score for up to 7 years. The “kiss of death” for your credit score is a bankruptcy. Avoid it at all costs! A bankruptcy will stay with you for 7-10 years.

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