Credit Scores
A credit score, also known as a FICO® score, is a particular calculation of your credit history that measures your trustworthiness to lenders. It is a number that credit-givers, such as credit card companies and car dealers, use to help them decide if they want to loan you money, by answering the following questions: Can they expect you to be able to pay them back as agreed and what are the odds you won’t pay them back at all? What amount do they feel comfortable loaning you? How much do they want to charge you? The less confidence they have that they will be paid back, the more interest they will charge you.
In Fashionista terms, a credit score can be the difference between being granted VIP status or being shown the door at your favorite store or club. A credit score tracks whether you are more likely to be a good customer or a bad customer.
Think of your favorite store. If you visit it frequently, are nice to the staff, are enthusiastic about their merchandise, and avoid bad behavior such as shoplifting or always trying to pay less than retail, they will love you. They’ll put you on their VIP list, you’ll get first dibs on new selection, sales and discounts, they’ll call you ahead of time to let you know your favorites are in stock, and in many other ways, they will take extra special care of you. On the other hand, if you’re a complainer who’s rude to the staff, reluctant to pay retail, and constantly return items for no good reason, you’re unlikely to be welcome, and in fact, will probably be discouraged from coming at all. The golden rule works here: Treat the stores the way you want to be treated, and the good karma will come back to you.
You can guess where I’m going with this. The more you respect your credit score, the more lenders respect you in return. This becomes really important when you suddenly have some big ticket items you’re thinking about buying.
Your credit score is a number that is assigned to you by a credit agency; it is a snapshot of the credit risk they judge you to be at a particular point in time. Credit scores range from 300, indicating you’re a poor risk, to 850, indicating you’re a great risk and will be offered the best deals.
When you borrow money or apply for a credit card, you typically go to a bank or credit card company, which will immediately look at your credit score. How much money did you earn, and how much did you spend? How responsible were you? Did you honor your commitments and pay your bills on time? What is your current net worth? The more responsible you have been financially, the higher your score. And a high credit score means that you will be allowed to borrow more money at a lower interest rate than a person who has a lower credit score.
So if you’ve got a great credit score, you can buy your car or your house more cheaply than can someone whose credit score is lower. Why? Because, you will pay less interest. Less interest is your reward for having built up such a respectable credit score. (With the money you save on interest you’ll have more left over… for other things, such as designer clothes and footwear).
To find out your score, call any one of the three credit agencies listed below and ask for your credit report. By law, you are entitled to one free credit report per year. If you want to check it more than once a year, like when you are purchasing something big, then you’ll pay a low fee to get a second report.
Equifax: www.equifax.com (800-685-1111)
Experian: www.experian.com (888-EXPERIAN)
Trans Union: www.transunion.com (800-916-8800)
So how do you maintain VIP status with your credit score? Review the five factors the credit agencies use to score you and try to maximize your points in each category. Pay your bills on time. Have at least one credit card, buy a little with it every month, and then pay the bill in full. If you have debts, pay them down or off. It might take effort and time to improve your score, but it can be done.
Add comment April 23rd, 2009