Know Your Credit Score As Your First Step In Financial
When considering your health and wellness, you might think of your diet, exercise, work- related stress, sleep patterns, etc. But do you ever stop to consider your ﬁnancial health and wellness? A lot of people do not. Many are in the dark--sometimes by choice--about their ﬁnancial health. But just like when you have strained a muscle or pinched a nerve, if you ignore your bills and debts and money problems, they don’t just disappear. They tend to get worse.
Every year you go to the doctor for a physical and your doctor weighs you, takes your blood pressure, listens to your lungs and heart and may even draw blood for a more detailed analysis of your health. Lucky for you, a ﬁnancial check up is nowhere near as invasive and you can do it on your own, if you wish, or you can hire a professional to help you along the way.
You may think that you are “bad with money” and there is nothing you can do. But just like we learn when we are getting sober, there is a solution. Over the next few issues, we will go over some basic foundational items to establish a baseline for your ﬁnances, and over time, you can improve on these things to get healthier and less stressed around money.
There are ﬁve key numbers to measure your ﬁnancial health when you are just starting out in ﬁnancial recovery. They are:
• Credit score
• Debt utilization ratio
• Debt to income ratio
• Savings rate
• Net worth
Today let’s talk about credit scores. Do you know what yours is? Do you know why it’s important? Do you know how to improve it? Lastly, do you know how to protect it?
Your credit score represents your “credit worthiness” to banks and lenders, insurance companies, landlords and even your employers. There are two types of credit scores, and I am referring to the FICO score in this article. Credit scores range from 300 to 850; the average score is 695. If you do not know your score, you can check it for free at www.experian. com or www.creditkarma.com. Checking your own credit score will not affect it. According to www.ValuePenguin.com, households in the state of Maine have an average credit score of 689, 2.91 credit cards and $5,784 in consumer debt.
"Many are in the dark—sometimes by choice—about their ﬁnancial health."
Why is this number so important? According to the companies that compile your credit history, the higher the number, the safer it is to lend to you, rent to you and employ you. Basically, a high credit score means you are less of a credit risk. The higher your score, the lower your interest rate is likely to be when you apply for a credit card, car loan or mortgage, potentially saving you thousands of dollars over the life of a loan. A landlord might look at your credit score and use it to determine if you’re likely to default on your rent. An employer might use the score to measure your trustworthiness.
Now that you know what your credit score is and why it is important, how do you improve it? There are several things you can do. First, you’ll want to get a copy of your credit report and review it for accuracy. Again, you can do so at www.experian.com for free. If there is any inaccurate information on the report, you can dispute it with the credit reporting agency. Second, make sure you pay your bills on time, all the time. Third, start to pay down your credit cards. If your available credit is $1,000 on a credit card, keep the balance below $500, or 50 percent utilization, to improve your score. Fourth, do not apply for new credit cards because every inquiry on your credit can cause it to go down. Also, do not close old credit cards. Having credit history is important in keeping your score higher. You can monitor your credit monthly if you set up an account at www.creditkarma.com and watch it grow over time.
Lastly, and maybe most importantly, how do you protect your credit? You can “freeze” your credit so that no inquiries can be made without your express permission. This can keep someone from opening a loan or credit card in your name. You can visit the Maine Bureau of Consumer Credit to start the process for free: https://www. maine.gov/pfr/consumercredit/ ﬁ le_freeze_info.htm.
All of the websites listed here provide a wealth of valuable information about credit and credit scores. If you need help navigating this issue, seek help from a professional. A ﬁ nancial coach, ﬁ nancial advisor, debt counselor, or the Finance Authority of Maine (www. famemaine.com) can be a great resource for you, no matter where you are in your ﬁ nancial recovery.