- Office of Consumer Affairs and Business Regulation
A good credit score allows consumers to borrow money from lenders, typically at lower interest rates. Your credit score also affects your ability to obtain things such as an apartment lease, mobile phone, insurance, cable, or utility plan. This month is National Credit Education Month, and it’s as good a time as ever to learn the intricacies of your credit profile.
Your credit score is a quantitative value of how reliable and valuable you are to potential lenders. The information making up your credit score, such as payment history, types of debt, amounts owed, and length of credit history is included within your credit report. Credit reports also include information that could negatively impact your credit score, such as tax liens, judgements, and bankruptcies. There are three bureaus that provide consumer credit reports: Equifax, Experian, and Trans Union.
According to the Federal Trade Commission, one in five people have an error on at least one of their credit reports. The higher the credit score, the better. A high credit score typically ranges between 700 and 850, while a poor score is below 600. According to Equifax, the average credit score in the United States was 698 last year. In recognition of National Credit Education Month, the Office of Consumer Affairs and Business Regulation compiled a list of tips and best practices for consumers to ensure that you build and maintain good credit. In order to maintain or improve your credit score, it is important to do the following:
- Pay on time. Payment history makes up about 35% of your credit score. Make all your payments on time. A positive payment history gives lenders a glimpse into your creditworthiness.
- Limit the amount of credit you have. Opening new credit accounts can damage your credit score. Consider keeping accounts paid in full open, even if they aren’t in use, and only open new accounts as needed.
- Maintain a low monthly debt-to-income ratio. Your debt-to-income (DTI) ratio is all your monthly debt payments divided by your gross monthly income. This number is one of the most important calculations from your credit report that lenders use to measure your ability to repay the money you borrow. A good DTI is below 35%, and anything above 43% may prevent you from obtaining a loan.
- Keep your debt utilization down. Another ratio to be mindful of is your credit utilization. This is the amount of revolving credit you’re currently using divided by the total amount of revolving credit available. Most lenders prefer a ratio of less than 30%.
As a consumer you are entitled to a free copy of your credit report every year from each of the reporting bureaus. The only way to get a free credit report is through AnnualCreditReport.com or by calling 1-877-322-8228. Review your credit reports and dispute any discrepancies immediately. For more information on disputing an error on your credit report, visit the Consumer Financial Protection Bureau’s frequently asked questions about filing a credit dispute.
The Division of Banks, an agency within the Office of Consumer Affairs and Business Regulation, offers an online resource for consumers to assist with making informed financial decisions. Visit Consumer Money Matters for details about the Massachusetts state-chartered financial institutions, lending, mortgages, debt collection, and more.
