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What’s Your Creditworthiness? By Janice Parker, Certified Consumer Credit Educator and Counselor

Janice ParkerCredit scores are vital to your financial health. A credit score is a number that helps lenders and others predict how likely you are to make your credit payments on time and mainly used to determine your creditworthiness for loan approval for credit cards, auto loans, mortgages and other kinds of credit. Additionally, your credit report and/or credit score is used when being considered for an apartment, insurance, and even employment. For most kinds of credit scores (as there are several scoring models), higher scores mean you are more likely to be approved and pay a lower interest rate on new credit. The most common type of credit scoring used by credit grantors is FICO (Fair Isaac Corporation). The algorithms used to calculate your score can be mind-blowing, so the most simplest way to ensure your highest credit score is to understand the factors that used by the credit bureaus.

1.) Payment History (35%) – Late payments, bankruptcies and other negative items such as collections can hurt your credit score, but a solid record of on-time payments helps your score. Did you know that one late payment on your credit report can impact your score for up to 4 years?

2.) Utilization/What You Owe (30%) – The scoring system looks at the amounts you owe on all your accounts, as well as how much available credit you are using. The more you owe compared to your credit limit, the lower your score will be. Did you know that keeping your credit utilization at or below 10% will increase your credit score?

3.) Length of Credit History (15%) – A longer credit history will increase your score. There is not a lot you can do about this but allow time to run its course. Did you know that closing a credit account can hurt your credit score because you are slashing some of the length of your credit history and reducing your available credit?

4.) New Credit (10%) – Applying for new credit accounts can be counted against your score, except when you are shopping within a focused period of time for things like mortgages and car loans. It’s suggested that you shop within a 30 day window to avoid lowering your credit score. Did you know that inquires initiated by the consumer with each credit bureau or from www.annualcreditreport.com, do not count against your score?

5.) Other Factors/Type of Credit (10%) – Several minor factors can influence your score. For example having a mix of credit types on your credit report such as credit cards, installment loans, auto loans, personal lines of credit and mortgages can contribute to an increase in your credit score.

By law, credit scores may not consider your race, color, religion, national origin, sex and marital status and whether you receive public assistance or exercise any consumer right under the federal Equal Credit Opportunity Act or the Fair Credit Reporting Act. Improving your credit scores can help you: lower your interest rates, speed up credit approvals, reduce deposits required for utilities such as cell phones, get approval for apartments and get better credit card, auto loan and mortgage offers.

The Fair Credit Reporting Act allows every consumer to obtain a free copy of your credit reports annually at www.annualcreditreport.com. I encourage you to examine the report for errors or inaccuracies. If you find any, you can dispute them. You can seek credit counseling assistance from a not-for-profit credit counseling agency. There are many credit repair companies who claim to fix your credit, however be careful to investigate to ensure it’s not a scam. The Credit Repair Organization Act (CROA) makes it illegal for credit repair companies to lie about what they can do for you, and charge you before they’ve performed their services. You can improve your credit report legitimately for free, but it takes time, a conscious effort and sticking to a personal debt repayment plan. No one can legally remove accurate and timely negative information from a credit report. Just remember…..anything a credit repair company can do legally, you can do for yourself at little or no cost. Resolve to be creditworthy in 2016!