Most people began 2012 with a list of financial resolutions. Like a boomerang, these same resolutions seem to return. We begin each year pledging to save more money, pay off debt and lower monthly payments but we never seem to get it right.
Do you want to know the secret to saving more money and paying less for what you buy? The secret is found in a three-digit number - your credit score.
Your credit score is a number that controls the health of your financial life. Because it guides lenders in determining your credit worthiness, your score affects your ability to get credit and the interest rate you pay.
But that's not all.
Your credit score is also reviewed by insurance companies, landlords, potential employers, utility companies and banks. Sadly, as vital as this number is to your financial well-being, far too many people are unaware of their score.
Most people can give you a number when asked their weight, gas mileage or size of their television, but surprisingly too many cannot give you their credit score. If you have only one resolution in 2012, it should be to know this number and what it means.
Tale of a Credit Score
A FICO publication gave an example of a couple applying for a 30year mortgage loan of $100,000 based on the rates offered by lenders in 2005. A 720 FICO score could have helped them qualify for a mortgage with a 5.5 percent interest rate.
However, if their score was 580, that same loan would have been 8.5 percent or more. The difference of 3 points on a $100,000 loan adds up to $2,400 dollars a year and $72,000 dollars over the loan's 30-year lifetime.
Given the state of today's economy, not only are the record low mortgage rates reserved for the consumer with the best credit scores, but those with lower credit scores can't always assume they will even be offered a high interest rate mortgage. Rather, they often get denied for any mortgage loan at all.
What Is Your Number & What Does it Mean
Now that you know a good credit score is the key to the best rates and cheaper borrowing, where do you stand?
You are able to get one free credit report per year from the three top credit reporting agencies: FICO via Equifax, Experian and TransUnion at www.annualcreditreport.com. These reports will give you detailed information of your credit history but do not supply the actual score.
Though this process can be cumbersome, you can receive your score without paying a fee. One way is to visit MYFICO.com and sign up for a free credit score with a trial membership but cancel this membership before the trial period expires.
FICO scores range from 300-850 and the average is in the 600s and 700s. Because the higher the score the better, most lenders like to see scores over 700. Scores below 600 indicate high risk to lenders and often result in higher rates or denied credit applications. In most cases, credit scores of 770 or higher receive the best possible rates offered.
How Your Score Is Determined
There are five components to a FICO credit score:
Your payment history comprises about 35 percent of the score's weight. You always want to pay your accounts on time. A history of late payments, bankruptcies or other negative behaviors hurts your score more than almost any other factor. Those who rate well in this category have a track record of regular on-time payments.
How much you owe on available credit lines comprises about 30 percent of a FICO score. FICO looks at how many accounts you have, the total of each credit line, and how much of the line you have used. If the accounts are maxed or close to the limit, this will bring down your credit score. Aim to never use more than 30 percent of an offered credit line to keep this rating favorable.
The length of time you've had a credit history makes up the next 15 percent of your score. Though a longer history increases a credit score, short credit history can also receive a high score if it shows responsible credit usage and management.
The frequency you apply or open new credit accounts is the next 10 percent of your FICO score. A single occasional account does not hurt your credit score, but numerous accounts opened in a short period of time will.
Other miscellaneous factors account for the last 10 percent of your FICO score. People with a longer credit history often have a variety of types of credit, such as mortgage, auto loans, credit cards, lines of credit, etc. A mix of well-managed credit types over an extended period of time can add to your score.
Raising Your Score
If your credit score is not where you would like, or if you are not being offered the best rates on your credit accounts, there are a number of things you can do to raise your score.
First, always pay your bills on time. A good way to control this is embrace automated or online bill paying for your accounts.
Second, if you have credit cards, keep the balances low. If you are close to maximizing a card, make a concerted effort to bring the balance down. When it comes to credit cards, it is always better to show that you are paying the account down and not simply moving it between cards.
Third, only apply for new credit when you absolutely need it. As tempting as it may be to open a store credit to receive a discount on your purchase, it can hurt your credit score.
Next, check your report regularly for accuracy. Correcting any errors will give you the higher score you deserve.
Finally, if you have missed payments in the past, make a commitment to stay current from this point on. The longer you do this, the higher your score will climb.
Credit scores are fluid. No matter what may have happened in the past, by practicing good credit management, you will begin to see your FICO score rise.
If you are planning to make a large purchase, such as a home, check your credit report ahead of time as part of the planning process. Thirty years is a long time to be paying a higher rate because you didn't prepare.
Resolving now to make your credit score the best it can possibly be will reward you handsomely in the years to come. There is no better feeling than knowing that if you need to borrow money, you will be a member of the interest rate VIP club.
Cindy Diccianni is a certified long term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is the principal of Argus Financial Group, Inc. You can contact her at www.TheArgusFinancialGroup.com or cindy@TheArgusFinancialGroup.com. Jeanne Lawson is Client Manager with Argus Financial Group Inc.