Throughout your life, your social security number will be used as the primary means by which government agencies, creditors/lenders, and employers will identify you. It is how they will track your income, whereabouts, age, and even tax status if necessary. Your social security number is also the number certain parties will use to track your creditworthiness.
Your creditworthiness is representative of your ability to manage your finances. It offers insight into the way you manage and pay your bills, how reliant you are on credit (CR), and how much debt you have at any given time. For logistical purposes, all of this information is wrapped up and calculated into a three-digit number, your official credit score (rating).Read More »
The Importance of Your CR Rating
If you have reached adulthood, there is a good chance you are already well aware of the importance of your CR rating. This single three-digit number will be used to help outsiders decide if you can get a loan when buying a home or car, rent an apartment, secure credit cards for merchant purchases, get your utilities turned on without a deposit, or if you qualify for employment.
Arguably, this is the single most important number that will ever be attached to your life. It’s incumbent on you to do everything in your power to keep your CR rating as high as possible. To be clear, your rating is not subjective. It is an objective number calculated through a widely used process. More about the calculation in the next section.
How is Your CR Rating Calculated
It’s noteworthy that several different companies accumulate data that other companies can use to calculate your credit rating. That translates to you having dozens of different ratings floating out there in the financial community. However, there is one CR rating that is more relevant to the three major reporting credit bureaus than others, the FICO score.
Data analytics company, otherwise known as FICO, short for Fair Isaac Corp., is the single largest and most ubiquitous source of information for CR reporting. FICO serves as the primary database source of information for the aforementioned three major reporting credit bureaus – Experian, Equifax, and TransUnion. By the way, while each of these three credit bureaus receives information from this same source, each of them uses the data a little differently to create their version of a person’s rating.
How is your CR score calculated? The answer is not clear. However, the information FICO accumulates for use in the calculation of your CR score is very clear. That information includes:
- Payment history (35 percent): tracking of late payments
- Amounts owed (30 percent): total outstanding debt
- Length of CR history (15 percent): how many years
- CR mix (10 percent): Types of CR and debt included in the mix
- New CR (10 percent): number of hard inquiries within the last 45 days
After accumulating the information and making automated calculations, which remain a mystery, each bureau can provide a CR rating number for each inquiry. Using the most basic FICO standard: the ratings stand as follows:
- Exceptional: 800 and above
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 579 and lower
If you are curious as to how you stack up against your fellow U.S. citizens, the average rating currently sat at just above 700 at the end of 2019. Before trying to buy a home/care or applying for a loan or credit card, you might want to check your CR rating beforehand. The cost is nominal, though you can find resources that will provide your rating for free.
How to Maintain and Improve Your CR Rating
Experts recommend that you don’t waste your time trying to constantly monitor your CR rating. In the end, it will only serve to create more stress in your life. If you are truly concerned about your rating and wanting to improve it whenever and wherever possible, there are steps you can take to help build and maintain your rating. Here are the five most basic steps you can take:
1. Pay Your Bills on Time – Without a doubt, the quickest way you can damage your CR rating is to miss a couple of important payments or pay your bills after their due date. If you can avoid doing these two things at all costs, your rating will stay strong and might improve.
2. Limit CR Inquiries – Creditors/lenders get nervous when potential customers start racking up CR inquiries. They don’t like to think a potential customer is simultaneously taking on even more debt. Recognizing this potential problem, the reporting bureaus will ding your rating for frequent inquiries within 45 days. Avoid inquiries when possible.
3. Maintain CR Utilization at 30% or Below – Your creditors/lenders report two primary numbers. They report your available CR and your current outstanding balance. As long as you keep your CR utilization below 30% of your available CR, your rating will remain stable. If you consistently pay your credit cards off each month, it could actually improve your rating.
4. Diversify Your CR Portfolio – One of the easiest ways to improve your CR rating while making use of debt is to make sure you use a wide range of CR facilities. You don’t want to have a large concentration of CR spread over credit cards or secured loans. You want your CR to represent diversity.
5. Start You CR Career As Early as Possible – As indicated above, the length of your CR history affects 15% of your CR rating. If you are just leaving college and entering the workforce, this would be a great time to apply for a credit card and maybe a car loan. At some point, you will likely be trying to rent an apartment/home. It would benefit you to actually have a CR rating prior to doing so. A CR score could also enhance your chances of landing a job.
Hopefully, the above information will help you better understand the importance of your CR rating and how it affects your life. You can use this information to help you better manage your finances on the way to financial stability