Right now we're all worried about the banking systems and our ability to secure loans in the future.
While we in the Ozarks sometimes feel sheltered from national economic plights, there's no doubt the effect will be felt in the borrowing process. One thing you can do personally is sure up your own books.
Your credit score can determine whether or not you get that loan you need to buy a tractor or build a barn. Not only does your score affect whether or not you get the loan, but how much interest you will pay. Fair Isaac and Company (FICO) is responsible for the most commonly-used credit score, and the number ranges from 300 to 850.
“Think of a credit score as a grade on how well you’ve handled credit in the past,” said Mike Witte, certified credit counselor with Credit Counseling of Arkansas (CCOA). “If you make A’s and B’s in school, then you are perceived as somebody who is responsible and conscientious. The same is true with your credit score: The higher it is, the more likely you will get favorable terms from a lending institution because you’ve demonstrated responsibility.”
And to demonstrate responsibility in improving your credit score, keep these five factors in mind.
1. Payment History (35% of score) – Have you always held up your end of the bargain? It should come as no surprise that making payments on time and in full is the most crucial FICO factor. In fact, one late payment can remain on a person’s credit report for seven years and lower their score by up to 100 points.
2. Amounts Owed (30%) – How much of the credit available to you are you using? For example, if you allow the balance to exceed 30 percent of the credit limit on your credit card, your score will suffer.
3. Length of History (15%) – Do you have a lengthy record of responsibility? Older accounts in good standing can help your score, while closing out accounts only shortens your history.
4. Types of Credit Used (10%) – Are you versatile? Revolving credit (e.g. credit card) and installment credit (e.g. mortgage) are the two major types of credit that figure into your score. Having both is a score booster.
5. New Credit (10%) – What have you done for your credit lately? It stands to reason that FICO holds recent activity more important than older activity. This fact enables even folks with shabby credit to turn over a new leaf and prove it’s never too late to improve their credit standing.
It may come as a surprise that income and assets are not factors in FICO’s credit scoring. You can obtain your FICO credit score by calling 1-800-319-4433 or visiting www.myfico.com. The cost ranges from about $5 to $7.
Though it may take a skilled mathematician to compute a person’s three-digit credit score, Witte reiterates that keeping a strong score really boils down to a good ol’ sense of responsibility; Just as if you were aiming to make straight A’s in school.
Mary Catherine Harcourt is a Director of Financial Systems with Credit Counseling of Arkansas.
