As of September 1, 2005, all Americans, everywhere are able to access their credit reports for free once every 12 months. The quickest, easiest way to obtain your report from the big three credit bureaus (Experian, Equifax and TransUnion) is to request it from the AnnualCreditReport.com web site, which allows you to access your report online.
Checking your credit report is also the first step toward building a higher credit score, which in this day and age, is a key factor in determining such things as whether or not you can borrow money, how much money you can borrow, and at what interest rate you may do so. Even the amount of your car insurance payments are affected by your credit score.
According to the My Fico web site, the median credit score in the U.S. is 723. Credit scores range from a low of 330 to 850 at the upper end. Generally speaking, the higher your score, the less you'll be charged in interest for mortgages, car loans, credit cards, etc. High credit scores can also lower car insurance payments.
The difference in the size of your payments can be substantial. Here's a recent example from My Fico showing what the amount of monthly mortgage payments would be for people with various credit scores (assuming a 30-year, fixed rate mortgage of $150,000 USD):
| How Credit Scores Can Affect Your Mortgage Payment | ||
|---|---|---|
| Your Credit Score | Your Interest Rate (%) | Your Monthly Payment ($USD) |
| 760 - 850 | 5.41 | 843 |
| 700 - 759 | 5.63 | 864 |
| 680 - 699 | 5.81 | 881 |
| 660 - 679 | 6.03 | 902 |
| 640 - 659 | 6.46 | 944 |
| 620 - 639 | 7.00 | 998 |
So, with so much of your own money at stake, what can you do to build a better credit score? Here's Political Calculations' short list of recommendations:
- Start by reviewing your credit report at least once a year, and begin fixing any mistakes on it that you find by contacting the appropriate creditor(s) and credit bureaus and requesting that they correct their error(s). Since it can take months before the errors are fully corrected, you definitely want these mistakes fixed before you borrow any large amount of money.
- If you find accounts on your credit report that you don't use anymore, close them. The only exception to this recommendation is that if its your oldest line of credit, you may want to keep it open, particularly if it's substantially older than your next oldest line of credit. The reason for this is not sentimental - at least 15% of your credit score is based upon your credit history, which considers the length of time that you've maintained a credit relationship. Longer is better.
- Rightsize your lines of credit. Most often, this will mean asking your lenders to reduce the level of credit available to you from them, if not closing the account altogether. The reason you want to do this is because the credit bureaus will determine an "ideal" amount of money that you may borrow, and the lines of credit that you don't use (or don't use much) will count against it. This is particularly important if you plan on borrowing a large amount of money that might push you over the "ideal" amount for your desired credit score.
- The most important thing you can do to increase your credit score is to pay your bills on time. 35% of your credit score is based on your history of making payments, so avoiding making late payments is key to getting the maximum score. Also, avoid filing bankruptcy since this will very much negatively affect your credit score.
The last bit of advice to help you maximize your credit score is to avoid co-signing loans with kids or others. If the people you co-sign with for credit cards or other loan agreements with don't demonstrate good discipline in making payments, it's not just their credit score that will take a hit, it will be your credit score that gets hit too.
Labels: personal finance
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