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Why You Need a Good Credit Score

Saving pennies to finally rid yourself of your walkup so you can buy yourself a fabulous condo or co-op with an elevator in New York City?

Before you break your piggy bank and lay out your hard-earned money, make sure your credit is in good standing.

Why is good credit important?

Late rent payments and maxed-out credit cards could derail your ability to buy your own place, or make it that much more expensive. That’s because credit history is one of the key factors your lender will use to determine whether you qualify for financing and at what interest rate you’ll qualify.

Two different terms are used when talking about credit: credit report and credit score. Read about them below.

What is a credit report?

Your credit report contains information about your credit history. This information can come from a number of sources, including lenders, utility companies and landlords, and is compiled by one of three major credit-reporting agencies: Equifax, Experian or TransUnion. Your credit report provides details about types of credit you use, how long you’ve used credit, balances and available credit on your credit cards, applications for new credit, whether you pay your bills on time, and whether any of your accounts have been sent to collection.

What is a credit score?

Your credit score is a numerical value assigned to the information in your credit report. While there are a variety of credit-scoring formulas out there, FICO is the most widely used. FICO stands for Fair Isaac Corp., a company that was the first to create a credit score in the 1980s. Your FICO score can range from 300 to 850. A credit score of 400 or less is considered low, while a score of 720 or higher is pretty healthy. In a lender’s eyes, the higher your credit score, the less likely you are to default or make late payments. Of course, your credit score is only as accurate as the information provided in your credit report – and mistakes do happen.

Where do you get your credit report?

The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. For more information about obtaining a copy of your credit report or to request your reports, visit www.annualcreditreport.com.

Once you get a copy of your credit report, review it and focus on fixing anything that’s negatively impacting your financial outlook. If there’s an error in your credit report, contact both the credit bureau and the organization that provided the information to the bureau. In writing, tell both parties what information is inaccurate, explain why you dispute the information, and ask for a correction.

What if you have bad credit?

If your credit score is correct but abysmal, you need to take action to repair your credit history. Use these tips:

  • Pay your minimum balance – and do it on time. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when payments are due. You may also consider having payments automatically debited from your bank account.
  • Do what you can to reduce balances. Stop using your credit cards and come up with a plan that puts most of your available budget for debt payments toward the highest interest cards first, while maintaining minimum payments on other accounts. Even paying an extra $25 each month will help reduce overall debt.
  • Don’t use up your line of credit. Lenders will look at the amount of credit available to you and what percentage of that credit you have used. If you’ve used 90 percent of your available credit, creditors will not consider you an ideal risk.
  • Just say no to new credit cards. Don’t apply for new cards and lines of credit right before you go home shopping. Part of your credit score is based on your credit age. First, reviewers consider the age of your oldest account and the average age of all your accounts. Opening a new credit card will lower the average age of all your accounts. Additionally, an inquiry is placed on your credit report when you open a new credit card even if you later decide not to accept the credit card. Inquiries account for about 10 percent of your credit score.

These changes won’t result in overnight improvement in your credit score, but long-term dedication to rebuilding your credit can make a difference.

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