When you go to the doctor for a routine checkup, your doctor checks your vital health signs by taking your blood pressure and checking your heart rate and respiratory rate. Unfortunately, we don't have such widely available diagnostic tools to check your financial health. But that doesn't mean you can't give yourself a financial health checkup.
In our prior post, What Is Financial Health?, we provided an overview of the six vital signs of financial health. Today, we're taking a deeper dive into the fifth vital sign: your credit score.
Your credit score is a three-digit number, ranging from 300 to 850, designed to represent the likelihood that you will pay your bills on time. Having a higher score generally means you've handled credit well in the past. This makes potential lenders and creditors more willing to lend to you and results in more favorable interest rates and credit terms.
While there are several different credit scoring models, one of the most widely used is the FICO Score. FICO credit scores ranges are:
Your credit score plays a vital role in your financial health. When you have good credit, it's easier to:
A good credit score not only makes it easier to get credit, but it can also save you thousands of dollars. For example, say you want to take out a $250,000, 30-year fixed-rate mortgage to buy a home.
According to myFICO's Loan Savings Calculator, with a FICO score between 760 and 850, the APR on your mortgage would be 2.343%. On the other hand, if your score is between 660-679, your APR would be 2.956%.
That might not seem like a huge difference, but over the life of your 30-year mortgage, the lower credit score would cost you an extra $29,005 in interest.
Because your credit score is so important, it's a good idea to check it regularly, especially before applying for new credit. This will help you stay informed about how your score changes over time, and it can help you quickly identify potential fraud or errors before they become a major problem. The good news is, you don't need to pay for pricey credit monitoring services to keep tabs on your credit score.
You can order free copies of your credit reports from each of the three credit rating agencies (Experian, Equifax and TransUnion) once every 12 months from AnnualCreditReport.com, but your credit report doesn't include your credit score.
So how can you get your credit score? Here are a few options:
To improve your credit score, it's important to know what factors go into calculating your score. The following habits will help keep your credit score healthy.
Payment history accounts for 35% of your FICO Score. Lenders like to work with borrowers who have a history of making on-time payments.
Your credit utilization ratio accounts for 30% of your credit score. This ratio is the percentage of your available credit currently being used. Using a high percentage of your available credit signals to credit rating companies that you're overextended and more likely to miss payments.
Ideally, you should keep your credit utilization ratio below 30%. So if you have three credit cards, each with a $1,000 limit, you want to keep your balance on all three cards below $900 (30% of $3,000).
Your length of credit history accounts for 15% of your FICO score. In general, a longer credit history translates into a higher credit score. That's why it's a good idea not to close old credit accounts, even if you aren't using the card.
Your credit mix accounts for 10% of your FICO score. Credit rating agencies like borrowers who use a variety of different accounts, such as a mortgage, car loan and credit cards.
New credit accounts for the final 10% of your FICO score. Opening several new accounts in a short period is seen as risky. So only apply for new credit when needed.
Managing your credit well leads to a higher credit score, making it easier for you to acquire constructive assets and take advantage of opportunities at low interest rates. This will put more money in your pocket to save, invest and grow wealth.
Janet Berry-Johnson is a freelance writer and CPA with a background in accounting and income tax planning and preparation. As a regular contributor to Business Insider, Money Crashers, and several other online publications, she helps make complicated tax and personal finance information accessible to readers.
Harvest helps increase the net worth of the 99% through artificial intelligence and financial automation. To date, Harvest has refunded over $2M in bank fees and interest charges to its members with the ultimate goal of increasing the net worth of everyday Americans by $1 trillion by 2030. Our platform starts with providing immediate relief through bank fee and interest charge refunds, orients a member's financial health with our proprietary PRO Index™, and keeps track of net worth over time aided by our suite of financial tools. Check out our 8-step guide on "How to Build Wealth from Nothing" to get started on increasing your net worth.
Disclaimer: Harvest is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.