| Understanding Your Credit Score
What goes into your FICO Score?
35% - How timely you have been with your payments
30% - How much you owe compared with your total available credit
15% - How long a credit history you have
10% - Whether you have recently taken on new credit or debt
10% - What mix of credit types you have
Learn Your Score. You have three FICO scores, based on your credit reports at the three credit bureaus: Experian, Equifax, and TransUnion (you're entitled to one free from each bureau every 12 months). Spot an error? Request a correction, following the instructions on the bureau's website. Let's say the size of a credit line was misstated or an account was mistakenly marked delinquent. Getting the error fixed could raise your score as much as 200 points, says Ulzheimer, who has also worked for Equifax and FICO.
Never, Ever Be Late.As you'll see in the pie chart above, the biggest chunk of your credit score comes from your payment history. Just one late payment can shave 100 points off a 750-plus credit score, says Ulzheimer. Lenders can't tattle on you to the bureaus until you're 30 days past due, adds credit expert Gerri Detweiler. But don't risk it. For all your bills, enter recurring due-date reminders on your computer calendar. Missed a payment? Get back on track within the next 30 days, and you should "get back the lion's share" of points lost, Ulzheimer says. More than 90 days late? The damage can stick for years. If it was a one-off lapse, call your issuer and plea for a good-will adjustment to your credit report. (It's a long shot.)
Remember the Magic 20%. The second-biggest factor in your score is how much you owe vs. how much credit has been extended to you. The part of this that's easiest to finesse is your credit card utilization rate, or your total card balances compared with your total credit limits, as well as each card's balance relative to its limit. Example: If you've charged $5,000 on cards and have $50,000 in credit, your rate is 10%. For the best score today, 10% is ideal, but you can probably creep up to 20% and keep a high rating. Unfortunately, with banks lowering credit limits and canceling unused cards, it's harder to maintain such a low percentage. In the previous example, if your available credit is cut to $20,000, your rate shoots to 25%. That could sink your score by as much as 50 points, says Ulzheimer. The lesson: Know your limits, watch for changes, and stay under 20% on each card and in total (0% if you'll be
Already above 20%?Paying down debt is the obvious way to lower your utilization rate, but another strategy is to apply for an additional credit card to increase your overall credit limit. That may cause you to lose a few points in the short term -- so don't do it if you're about to apply for a mortgage -- but it should pay off in the long run.
Keep Oldest Cards in Play. As noted, credit issuers these days are eagerly canceling cards that are not in use. Besides reducing your limit and increasing your utilization ratio, having an account closed can hurt you in another way, especially if it's among your older ones. See, 15% of your score rides on the length of your credit history. The longer you ably manage revolving debt, the better you look. So don't cancel your oldest cards. And don't let them get canceled on you: Move a recurring charge to each so they stay active. Already ditched or been ditched? A new card (see previous) can help with your utilization rate, but there's little you can do to help the "history" component of your score, except to keep other old accounts in use.
Accept Fate on the Rest. There are other factors involved in your score, but they're not so easy to manipulate. For example, 10% is based on how well you manage a mix of credit types, such as mortgages, car loans, and credit cards. But you don't want to go out and, say, finance a car just for a score boost; besides, you can easily get 750-plus with just a few well-tended credit cards. Along the same lines, 10% is based on "new credit," but the effects of a new application can be positive or negative, depending on your history. In other words, if you want to be among the cr me de la credit cr me, accept what you can't change, and focus on what you can. Source: cnnmoney.com
Using Credit Wisely
To use credit intelligently, start by examining the terms of the card(s) you are currently using. Keeping track of your cards, their rates, and your current balances will help you to be aware of how you use credit cards. Increased competition in recent years has led some credit card companies to offer enticing features to attract new cardholders, including no annual fees and low interest rates for an introductory period. (And credit card companies sometimes will give their introductory rates to existing cardholders so that they won't transfer their balances to another credit card company.)
Source: Yahoo Finance
Managing Debt and Credit
Credit was once defined as "Man's Confidence in Man." But in fact, the definition of credit today is more like "Man's Confidence in Himself." Using credit today means you have confidence in your future ability to pay that debt. Forty years ago, your parents may have paid cash for their homes and their cars, a largely unheard-of event today. If they borrowed money at all, chances are it was from a relative or friend, and not a financial institution.
Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit cards to spend more than they earn, and a few of these people actually build themselves a debt prison from which some never emerge. On the other hand, those who never use credit can be denied a loan or credit when they have a justifiable need or use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced. What is the balance between using credit wisely and staying out of overwhelming debt?
DEBT KEYS TO REMEMBER
-Installment debt means the loan is paid off in a specified period of time by making predetermined payments periodically.
-Revolving credit is a line of credit that is instantly available through use of a credit card (and sometimes a check).
-As you pay down your debt in a revolving line of credit, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay.
-Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.