Managing Your Credit Rating
Credit ratings are an important measure of a person’s financial wellness. Think of them as a report card for your finances. Lenders review credit ratings to determine the risk associated with the requested loan. The higher your credit score is, the more likely it is you will repay your loan. As a result, individuals with high credit scores often enjoy lower interest rates and more financing options when borrowing money.
Considering many home mortgages are 30-year loans, any reduction in interest rate can add up to significant savings. Not sure where your credit stands? Here’s how you can review and improve your score:
Review your rating.
Check your credit rating annually for free at annualcreditreport.com. This website is promoted by the federal government and provides credit reports from all three nationwide consumer credit reporting companies. Review the reports for accuracy and take the recommended steps to correct any errors associated with your activity.
See how you measure up.
Your credit score is a three-digit number, typically between 300 and 850. Higher scores represent better credit ratings. Any score of 720 or higher is considered excellent. Scores below 630 are considered poor.
Review the contributing factors.
The method used to calculate credit rating considers many components. One of the biggest factors that can negatively affect your score is missed payments. A lack of credit or a lack of credit diversity can also be an issue. Aim to have a mix of revolving credit, such as credit cards, and fixed loans, such as auto or home loan payments, which demonstrates your ability to manage debt and make payments as planned. However, avoid over-leveraging yourself. Too much debt can also impact your score. A general rule of thumb is to use no more than 30 percent to 35 percent of your available credit.
Manage your debt.
If you determine there is room to improve your score, start by creating a monthly budget to see where you can spend less and save more. Can you pay extra on high-interest credit cards? Do you need to expand your credit diversity? Your lender can provide guidance for reducing debt, building your credit history, and planning for a healthy credit future.