Understanding fundamentals of credit

(THE MONEY PROS) - When we think about our balance sheet we don’t always think about credit.  But it’s certainly a valuable asset. 

Good credit and your ability to borrow money are just as valuable to your financial health as a bank account or retirement plan.  Since many of our largest financial goals do not allow us to purchase them with cash on hand, credit is obtaining credit at reasonable cost is critical. 

Purchasing a home or financing an education are two examples of when credit is often needed.  Having good credit will allow you to get the amount of the loan you desire, lower the rate and ultimately lower your payments.

Your credit is described by a FICO (Fair Isaac Corporation) score.  It can range from 350-850.  The higher your FICO score the better your credit.  This score is comprised of five factors:  

1. Payment History (35%): record of how timely you pay back your creditors.
2. Amount you owe (30%): includes current balance, original loan and credit available.
3. Length of Credit (15%): time of last activity and when the account was opened.
4. Recent Inquires (10%): time since last inquiry and number of inquiries.
5. Types of Credit (10%): mix of installment loans and revolving credit.  

To improve your credit score consider these steps:

1. Pay your bills on time.  If this is difficult, try using your financial institution’s online bill payment system.
2. Don’t borrow up to the limits:  maxing out your credit or credit card will lower your credit score and shows lenders you have a hard time handling debt.
3. Keep accounts open:  since history is a big factor, keep your cards open to show a long history of good payments.
4. Only apply for accounts you need: don’t sign up for cards because of a logo on the card, a promotion, etc. 
5. Beware of excessive inquiries.  While shopping around is fine, frequent unrelated requests for your record by lenders can reduce your score

Make sure to check your credit report regularly.  It is recommended that you monitor your credit report three times per year.  Go to the free government sponsored website www.annualcreditreport.com , which allows you a free credit report from each of the three credit bureaus once a year.  Be sure to check all members of your family including your children.