A Beginners Guide to a Credit Score

If you’re like most Americans, balancing your checkbook is a monthly chore. Keeping track of all your expenses and categorizing each with the receipt is tedious, but a huge step toward financial freedom and stability. But another important factor that usually goes overlooked is your credit score.

When you first research it, understanding a credit score can seem complex, but as long as you pay your bills on time, there’s nothing to worry about. The financial system favors consumers who are consistently responsible when it comes to paying bills each month.

The Basics of a Credit Score

I always thought that even a penny of debt was awful and would count against me, but I was pleased to learn that as with all upstanding things in life, a credit score is about balance.

A credit score, or FICO score, is the culmination of a person’s credit-to-debt ratio. This indicates the credit-worthiness of a person, or how reliable you are to paying bills on time. FICO scores are used by banks, insurance companies, landlords, employers, and other parties to assess whether or not you are deemed “creditworthy”.

It also determines if a person meets the minimum qualifications. For example, if you’re applying for a home mortgage, there are loan programs that offer better terms. In order to qualify for the better programs, you will have to meet a lenders minimum credit score requirement. Your score will also determine loan interest rates and credit limits.

FYI: Credit scores do not take into account credit or savings accounts you have. It’s purely based on your credit-to-debt ratio.

What’s In A Credit Score?

One of the requirements for a credit score is that you have an account open for six or more months. For those who are juniors or seniors in college, it’s smart to get a head start on your credit by applying for a starter credit card as early as you can.

Missed or late payments can destroy your credit score, so the best strategy is to establish a good track record of making your payments, or at least your minimum required payment, on time each month.

Below is a list of the five major factors that determine your credit score.

  1. Payment history
  2. Credit-to-debt ratio
  3. Credit history length
  4. New credit opened or requested
  5. History of credit (i.e. student loan debt)

One of the things to remember is that there’s no “quick fix” for repairing or improving your credit score — it takes time. Be careful of any service that claims to “improve your credit fast.” You can’t remove what’s already listed in your credit history unless it is incorrect information, which you’re legally able to dispute, though it is a lengthy process.

Where Do I Get A Credit Score?

A FICO credit score ranges from, 300 and 850 (with 850 being the best). The higher score indicates a low risk, which is what lenders like to see.

You can go online to request a copy of your credit score directly from the three major credit bureaus, Experian, TransUnion, and Equifax. Each credit bureau has their own method for calculating your score, but they all use FICO as the accepted method.

Are Credit Scores Really Free?

Under the Fair Credit Reporting Act, you’re legally entitled to one free credit report every twelve months (annually) from each of the three major bureaus. You can visit the websites below to directly request your credit report from all three of the credit bureaus.

  1. Equifax
  2. Experian
  3. Transunion

Also if you want to keep track throughout the year, online tools such as the CreditKarma.com credit score simulator is useful. It makes it super easy to estimate your score throughout the year based on your activity.

What’s On A Credit Report?

  1. Personal Info: your legal name, address, social security number, date of birth, and employment status.
  2. Accounts: this includes type of account, date it was opened, credit or loan limit, account balance, and payment history. Remember that a credit score does not include activity on your personal checking and savings accounts.
  3. Number of Inquiries: this is a list of everyone who has accessed your credit report within the last two years. This part includes both ”voluntary” and “involuntary” inquiries. Voluntary inquiries are those you personally authorize (i.e. credit card application) vs. involuntary inquiries (i.e. pre-approved credit card offers).

Negative Inquiries: may include missed or late payments, overdue personal debt from a collection agency, and public record info such as house foreclosures, bankruptcies, suits, tax liens, etc.

If you leave this post with anything, please remember that credit cards are only beneficial to you if you pay them off.

Someone without any credit history is likely to be categorized as a higher risk. My advice would be to open a student, or pre-paid credit card early, and make sure to establish and maintain good credit.

Today's article is a guest post brought to us by MortgageWiki.org.

The Road to Tax Simplification

President Bush brands the 3.7 million word tax tome a “complicated mess;” President Obama dubs it a “monster tax code.”  Both appoint Blue Ribbon Tax Reform Commissions that deliver balanced reports, loaded with good ideas. Neither will see the light of day; K Street special interest demons will see to that.

Will Rogers gets it right again: “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

But it turns out that quietly and unwittingly lawmakers may have finally got it right when they passed the bipartisan “Plain Writing Act of 2010” (H.R. 946), to which the Editor-in-Chief penned his signature on October 13th.  This stealth law requires all federal agencies, including the IRS, to use “plain language” in written communications with all their constituencies. 

If the IRS technocrats take this mandate seriously, that means all the tax forms, instructions, notices and gobbledygook communications that come our way have to be revamped; in a format allowing us to read them only once to get the drift; and then to know what to do, to do it right, and right away.

Can the venerable Taxman overcome French philosopher Blaise Pascal’s satire on verbosity: “The letter I have written today is longer than usual because I lacked the time to make it shorter.”?  Can we expect to see the tax icon 1040 trimmed to a couple of understandable pages and its instruction book slashed from 103 pages of gibberish to a short story of clarity? Will the Agency find a new name for Form 8840 – Closer Connection Exemption Statement for Aliens, to tell UFOs they don’t have to file a tax return?

The answer is “Yes,” and here’s why.

The plain language movement has been around for decades. It has taken hold in the business community and companies that practice its teachings enjoy a measurable competitive edge. It is folly to argue, as some will, that bureaucrats can’t dramatically sharpen their written message. The success stories around the few government agencies that take Plain Language seriously are well-known and indisputable. 

The new law requires government documents to be written clearly, concisely, well-organized, and to follow other best practices appropriate to the subject and intended audience.  The mandate to the IRS couldn’t be plainer or clearer. 

The government estimates we toil 3.8 billion hours each year on the 1040 alone. But tax simplification is not just about easing the burden for 120 million individuals and hundreds of thousands of small businesses, come April 15th.  It’s also about converting confused, agitated and tempted non-compliers into silent, mollified and compliant taxpayers. The country’s tax compliance rate is 86 percent and every one percent improvement will produce an added $20 billion in revenues. That’s serious money in today’s era of unsustainable trillion dollar deficits.

The sure-fire and direct road to tax simplification is through the halls of Congress.  That won’t happen.  A less flashy and more incremental path is through the agency that is the face of government to, and touches virtually all, Americans.

Success in achieving the IRS’s ultimate mission – maximizing taxpayer compliance – is directly linked to the quality of its touch.