Did you know that having a good credit record could save you $6,000 in interest when buying a $20,000 car over four years? Multiply that by the size of the loan and a longer period and you’ll get some idea of the dramatic difference in repayments on a mortgage — with a poor credit record you could pay as much as $40,000 more on a $300,000, 30-year loan.
Lenders use what’s known as a FICO score to decide how much interest you should pay, or if they should even lend to you at all. The higher your score, the lower the likely interest rate. So it obviously makes sense to do all you can to protect and improve that score. But how do you do that?
Well, your credit rating is under attack on two fronts: First, from the way you run your finances; and second, from crooks who steal credit cards or even assume someone else’s identity and run up huge debts.
Managing Your FICO Score
Let’s talk about your finances first. Your FICO score is calculated by a secret formula by a private company, based on information from the credit reporting agencies. The agencies — Equifax, Experian, and Transunion — maintain records of all your credit cards and loan payments, including how much you owe and whether you made your payments in time.
You can get a free copy of your credit report from each of the three agencies once a year via the site AnnualCreditReport.com. Avoid other sites offering a free service because this will usually have strings attached. You can’t get your FICO score for free though (except as an opening incentive to get you to sign up for a recurring-fee, score-monitoring service or sometimes free as a credit card benefit), but you can buy it for about 20 bucks from myFICO.com.
A good score is 760 or above and a really bad score is under 620 and the difference between the two can account for up to a couple of percentage points in the interest rate you pay. Here are some of the things you can do to keep your score as high as possible.
First, and most obviously, always make your payments on or before the due date. If this is likely to be a problem, contact the lender to discuss arrangements.
Try to keep your credit or store card spending at 30% or less of your limit. Note that even if you pay off your card every month, the agencies report on how much you owed before the payment.
So, bearing the above in mind, spread your payments between several cards to keep that percentage down, and don’t ask the card companies to reduce your credit limits!For the same reason, consolidating all your debt on to one card may push you over that magical 30% on the chosen card, which could go against your score.
Hold on to and use your “old” cards — the ones you’ve had the longest (and kept in good health) seem to rate highest in calculating your score.
Monitor you credit reports using the free service mentioned above. Stagger the three reports across the year — one every four months — and check for errors in things like credit limits and late payments.
If you find errors, contact the card company or ledner and ask them to correct them. They may even agree to remove one late payment notice if you’ve otherwise been a good customer.
Generally, don’t have too many cards, although successfully applying for credit when you’ve had past financial troubles can sometimes help lift your score.
Protecting Your Credit Record from Crooks
Monitoring those credit agency reports will flag up anything unusual with your cards — for example, cards or loans taken out in your name that you know nothing about. But you need to be much more vigilant than that because, by the time you identify this kind of activity, your credit record and score may already have been wrecked and it takes an age to set them straight.
Instead, you should also monitor all your financial accounts as often as possible to spot discrepancies. If you can access accounts online, you could set up a routine that ensures you check at least one of your accounts every day. If you only get printed statements once a month, check every item carefully.
If you discover any spending that’s not yours, notify the card company (there should be a 1-800 number on the back — keep a separate note of this) or other lender. You should also notify the credit reporting agencies (Equifax 1-800-525-6285; Experian 1-888-397-3742; Transunion 1-800-680-7289) — and the police, of course.
If either threat to your credit record really worries you, you might consider having your records and accounts professionally monitored. Services usually cost around $15 a month. Search online for “credit record monitoring.”
A good credit score will save you money and a good credit record may even be a factor in employment. It pays to look after them.