Your credit score is the single most important tool institutions use to determine your creditworthiness.
Without a credit score of 700 or over, you won’t get the best rates on mortgages and car loans, and you may not get that apartment or job that you dream of.
Your credit score can also affect the price you pay for auto insurance. A low credit score can prevent you from getting what you want or make what you get much more expensive!
If you don’t know your credit score, do this:
Pull your credit report from each of the three credit reporting agencies: Experian, Equifax and TransUnion. You can do this by going to annualcreditreport.com, which is a government-approved site that will get you free access to your credit report. Warning: Ignore all solicitations to buy anything when you are accessing your credit report on annualcreditreport.com. Just get your free report.
Unfortunately, you won’t get your credit score on the credit report. But you can get that information for free from websites such as Credit Karma or myfico.com. Remember, don’t buy anything you don’t want when visiting these sites!
At this point, you have access to what lenders see when they pull your credit report. What is your score? If it is below 700, you have some work to do. If it is above 700 — congratulations! Keep up the good work, but be ever vigilant and know that 750–850 is considered excellent, so you have something to strive for if you aren’t there yet. Fortunately, Your Credit Score Is in Your Hands to a Great Degree.
If your credit is less than stellar, you can turn it around with some work. Most importantly, always pay all your bills on time. Use your credit cards, but pay them off in full each month. It’s beneficial to have different types of credit: a credit card, a car loan, and a mortgage, for example. If you are young or can’t get a credit card for other reasons, establish a secured credit card with a bank. This is a card backed by your savings, and will help you to reestablish a good credit history.
As a financial planner, I know too well how important good credit is to the financial health of my clients. Excellent credit is a financial asset that can pay huge dividends across all areas of your financial life. But the world of credit bureaus and credit reports can be a little confusing to many people. Maybe even a lot confusing.
If you weren’t already aware, whenever you apply for credit, whether for a mortgage, an auto loan or a home equity loan, the lender is going to “pull your credit” and take a look at your FICO score. That score is a hugely important metric. Virtually every lender depends on the FICO score to measure your creditworthiness. A “great” score means you’re eligible for the best possible interest rates. A “good” score means you can get a decent, but not “lowest possible” interest rate and so on. But what is “great” and what is “good” and who decides?
The good news is, it’s possible to improve your score. The not so good news is that banks and other lenders, frequently adjust what a “best score” is depending on overall economic conditions.
Jeanne Kelly is founder and CEO of The Kelly Group, based in Danbury, CT. The Kelly Group is a credit repair firm that specifically works with their clients to improve their FICO scores. The company works with individuals directly and with mortgage brokers. Jeanne was kind enough to spend a few minutes discussing the nuts and bolts of FICO scores.
Q: So what exactly is a FICO score? What does it measure exactly?
Jeanne Kelly: It works like this. Thirty five per cent of your FICO score is derived from your payment history. Thirty per cent comes from amounts owed on revolving balances. That’s a huge number – and people should know that by lowering balances owed, that could really help your score. Length of credit history is 15%, new credit is 10% and types of credit used is 10%.
Q: So there are five categories that go into your FICO score?
Jeanne Kelly: Right. If you understand this, you can work with your FICO score and stay on top of it and hopefully improve on it.
Q. Where does FICO get the information?
Jeanne Kelly: From all three credit bureaus – Experian, Equifax and Trans Union. A simple way to think about this is that FICO looks at your credit report and gives it a grade. So in order for the grade to change, you are really dealing with the credit bureaus, not FICO.
Q: How often is the information updated?
Jeanne Kelly: It could be updated every day. It depends on when your creditors decide to report your balances.
Q: Where does a person get their FICO score?
Jeanne Kelly: The thing to watch for are those offers where someone will give you your “credit score”. I’d stay away from that. Since most lenders are using FICO scores, then that’s what you want. Go to www.myfico.com — that’s exactly where you want to go.
Q: If a young person is just getting out of college, do they have a FICO score?
Jeanne Kelly: Well, you have a score if you’re using credit. You have to have two to three accounts to get a score. So whether it’s an automobile, a major credit card, a store card, a student loan – as long as you have three things reporting, you’ll get a score.
Q: How do you feel about young people and credit?
Jeanne Kelly: I suggest using credit in a healthy way and I also suggest trying to start young. I know people get afraid because college kids get these credit card offers and some of them go wild. But if you start young, by the time you’re 25, you will have learned how to use credit correctly and you’ll have a great score and get better interest rates.
Q. What’s a good score?
Jeanne Kelly: You know things change all the time; if you asked me that question last year I would have told you 680 was “A” credit. Now it’s 740.
Q. What changed?
Jeanne Kelly: Well, look around you. The banks have tightened credit, they’re being more cautious. People are talking more than ever about credit because of what’s going on in the economy and I’m glad — being aware is a good thing. If people are informed, then they can figure things out and improve their scores. But right now this is what banks are doing and people should be cognizant of that.
Q. Should people continue to use credit?
Jeanne Kelly: I do see people being afraid of it now. I’ve heard people say, “I’m going to use my debit card.” That’s a mistake. It’s perfectly okay to use credit, just do it in a healthy manner.
Q: Is it possible that your score is one point below what the lender needs to give you the best possible rate?
Jeanne Kelly: That does happen, sure. It’s like being in school – you might have to get a 90 or above to get an A. If you get an 89, you’re getting a B+. In that situation, you wait a little bit, you pay down some balances and try to move your score a bit.
Q. Is the FICO score a fair measure of a person creditworthiness?
Jeanne Kelly: I think it is. For the banks that are issuing credit, it simplifies the process quite a bit. Rather than trying to evaluate all the information in a credit report, or three credit reports, they have a grade. I think it’s a fair system.
Q. If someone believes that their score is inaccurate or isn’t a fair representation of creditworthiness, what should they do?
Jeanne Kelly: I would look at whether all your bills are being paid on time. And look at your balances. Remember earlier I said that 30% of the FICO score comes from revolving balances? Well here’s a great tip. If you keep your available balance to 20% or less of your credit limit, you’ll maximize your score for that particular portion of the FICO score.
Q: How long does it take for your FICO score to change?
Jeanne Kelly: It could take up to 90 days. So if you’re planning to go house hunting, be aware. You should start looking at your score months and months in advance.
Q: How does the Kelly Group help its clients improve their score?
Jeanne Kelly: We work directly with the creditors reporting the derogatory information on our clients’ credit reports. We’re the middle person. We know who to talk with to get the best, fastest results. We’re going to make sure that your creditors report accurately and we’re going to educate you at the same time. We’ll suggest what accounts to pay down, we might suggest opening a different account or closing an account.
Q: How much improvement can you achieve?
Jeanne Kelly: Well, every case is different. Some people might get a ten-point spike; others might see a 100-point gain. On average, our clients see a 50-point increase.
Q: That’s a big jump.
Jeanne Kelly: When you’re talking about a 30-year mortgage, it’s very dramatic.
There’s so much money riding on your FICO score. If you look at the interest on a thirty-year mortgage and the difference a better score could make, it’s just incredible. Think about it – when we do our taxes, we hire an accountant, when we go into a court of law, we hire a lawyer to protect our interests. With something as big as this, we really need someplace to go. That’s what we’re doing – we’re a small company trying to do the right thing.
Q: This has been fantastic. Really very helpful and informative, thanks so much.
Jeanne Kelly: I loved it! Thank you!
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Abby is Thirteen and She Understands Money Better Than You Do
As a fee only financial planner, I meet far too many adults who know shockingly little about money and personal finance.
A small sampling of the questions I hear reveals the knowledge gap: “What’s an index fund?” “What’s an IRA?” I’ve heard this one too – “I thought the stock market earned 10% a year?” Well yes, sometimes it does, just not ALL THE TIME.
Why this lack of knowledge? How did we get here?
Two thoughts spring to mind: the schools don’t teach our kids about money. And, parents are a little shaky on this topic too, owing to cultural taboos around talking about money. We’d sooner talk about our sex lives!
I wanted to find out if there were any young people – teenagers, specifically – who were at least marginally educated about money and finances. If we can get our kids squared away on money, then maybe there’s hope for adults. So I set out to interview some teens.
She’s Thirteen and She Loves Talking Money
Meet Abby – she’s 13, and she lives in San Rafael, California, one of the wealthiest counties in the country. Abby comes to the interview with her mother Claire, who co-owns the Hatch Network, a company that provides education for women entrepreneurs.
It becomes quickly apparent that young Abby is most definitely not your typical 13 year old. My first clue — she would love to talk about money, she tells me, and would be happy to meet with me for an interview. How many 13 year old girls do you know who’d say that?
Does her school provide any classes about personal finance or money?
Abby says a Junior Achievement program provided two classes about how to pick stocks and follow them in the newspaper. Other than those two classes, nothing else focused on personal finances.
Why did she like to learn about money? What sparked that interest?
Some time ago, when her mom (single and in her 20’s) had money troubles it made Abby curious to know more. It was tough for mom to make ends meet. Her mom was always honest and candid with Abby about their situation, explaining, always explaining.
Does She Read About Money?
Abby has read Rich Dad Poor Dad for Teenagers and the Automatic Millionaire. She pays attention to the financial news(!) Her interest in making a lot of money as an adult is not self-centered, she says. After she earns what she needs, she wants to give the rest to charity.
Does She Have Savings?
Abby has a savings account and wants to buy a CD with her $1400.00, but she thinks interest rates are too low to lock in a rate right now. She’s earning about .05 % on her savings account. She knows that’s a paltry amount and would like to earn more. The minimums for money market accounts, which pay a little bit better interest rate, are too high for her, so she’s biding her time.
Have I mentioned that Abby is 13 years old?
We talked about credit card debt and credit scores. Again, Abby was well versed. She knew that having a high credit score was very important and that the best way to maintain a high credit score was “to pay all your bills on time.” She knew about retirement accounts (401K’s and IRA’s), and what 529 plans were (her grandmother funds one for her). She also likes to follow certain stocks like Google and Apple.
In the Future: Musician, Secret Agent, Saver
Abby is a great student, she receives A’s and B’s in all her subjects. She earns money by doing odd jobs for her mom and she baby sits. She saves all her birthday and Christmas checks and immediately deposits them into her checking account. When she grows up she wants to be either a musician, a secret agent or, maybe a financial advisor.
Granted, Abby is not your typical 13 year old. She wouldn’t be typical as a 30 year old either. But her innate curiosity and intelligence, combined with her mother’s candor, patience, and teaching, have paid (and will continue to pay) huge dividends.
So the lesson is this: anyone, kids included, can learn more about money, and how to better manage their own finances. In an ideal world, the schools would teach personal finance and parents would reinforce the lessons initiated in the classroom. So what about you? What did you learn about money as a young person? Are you teaching your children how to save and plan for the future? Any questions that I can answer for you?
Thanks for reading and stay tuned for more interviews in later blog posts.
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