Are you financially fit? Do you know your credit score? According to thebalance.com, Alabama is ranked in the bottom 10 in credit score rankings. Alabama’s average credit score is 687. Credit is a vital part of financial wellness. This average credit score communicates to lenders your creditworthiness. While the state’s average credit score is 687, it is crucial to know and understand your score. A low credit score can negatively impact your ability to buy a home or rent an apartment. It can also influence whether you are required to make a down payment for utilities or a cell phone plan. In addition, you may also pay more for insurance and a vehicle. Below are six important steps to follow for repairing or building your credit.
Monitor your credit report
— Visit www.annualcreditreport.com for your free credit report from each of the three credit bureaus: Equifax, Experian and TransUnion.
— Keep in mind, your free report does not include your credit score. However, ordering your free credit report will allow you to see the information on your report, including what you owe and how it affects your score.
— Consider paying a small fee to receive your credit score from the three credit bureaus.
— Carefully review your accounts.
— Check for inaccurate information such as dates, addresses, amounts or debtors. If you see any accounts open without your permission, dispute those accounts so they can be removed from your report.
— Know what debt you owe and how much.
Pay your bills on time
— Your payment history makes up 35 percent of your FICO score. A FICO score is created by Fair Isaac Corporation (FICO). It is used by creditors to access risk in addition to other details in the credit report to determine whether to extend credit to an individual. Know the due date of each bill and make sure to pay on time each month.
— Be sure to make at least the minimum payment each month. However, paying more than the minimum will lower your principal balance.
— If possible, pay the total balance on your credit cards each month. Paying in full will prevent you from paying interest.
Use no more than 30 percent of your available credit limit
— Amounts owed make up 30 percent of your FICO score.
— Use no more than 30 percent of the available credit limit. *Ex. For a credit card limit of $300, ($300 x 0.30 = $90). In this example, following the 30 percent rule means you would only use $90 of your available credit limit.
— Work towards decreasing each balance.
Pay attention to credit history
— Credit history makes up 15 percent of your FICO score.
— Be sure to make payments on time or early each month and keep credit usage at 30 percent or less. Over time, you will build a positive credit history.
Have different types of credit
— Credit mix makes up 10 percent of your FICO score.
— Have a mixture of revolving and installments accounts.
— Examples of revolving accounts are credit, retail or gas credit cards.
— Examples of installment accounts are mortgages, auto loans or student loans.
— A good credit mix may include a mortgage, vehicle loan and credit card. Only having several credit cards is not a good credit mix.
Keep new credit to a minimum
— New credit makes up 10 percent of your credit score.
— Don’t apply for more than two new credit accounts within two years.
— Applying for several types of credit in a short period of time signals to creditors that you are attempting to accumulate debt.
— Understand that all applications for new credit will appear on your credit report whether they are approved or denied. This is called an inquiry.
Be aware of scammers who offer to “fix” your credit score overnight for a fee. Credit scores are often increased when payments are made on time. Dedication and commitment are required when following recommended steps to build or rebuild your credit score. According to the Federal Trade Commission’s warning about scammers tactics, “only time and a personal debt repayment plan can improve your credit.”
The Federal Deposit Insurance Corporation (FDIC) reminds us that “the higher the score, the lower the credit risk.” It is important to know your credit score and how it impacts your life. Whether you are building or rebuilding your credit, the steps are the same. There is not an overnight fix, but over time you can become creditworthy. Remember to monitor your credit report, pay your bills on time, use no more than 30 percent of your available credit limit while decreasing balances owed, pay attention to credit history, have a good credit mix and limit your applications for new credit.
For more information about this topic or other financial management and/or workforce development questions, please contact Emily Hines, Human Sciences Regional Extension Agent, at (205) 757-5393 or email [email protected].