The 3 Kings of Credit

Key Takeaways

  • Check your credit score annually to make sure there are no errors in your financial history. Free credit reports can be obtained at AnnualCreditReport.com.
  • The Fair Credit Billing Act requires the three main credit rating agencies—Experian, TransUnion and Equifax—to correct errors and disputes pertaining to your financial history.
  • To bolster your credit rating, make payments on time, manage your cash flow wisely, correct errors in your credit history and don’t utilize more than 30 percent of your available credit.

Understanding credit is like understanding the three kings from the Bible. You have three dominant credit agencies—Experian, TransUnion and Equifax—and in many ways they hold the keys to the financial kingdom. Your credit score will have a huge impact on your ability to access capital, obtain loans and so much more. A bad credit score can stay with you a long time and negatively impact your financial freedom and wealth-building plans. The first thing you need to know about credit scores is FICO—shorthand for Fair Isaac Corporation, which gathers information provided by the three credit reporting agencies and creates an algorithm to determine whether or not they think you are a good credit risk.

FICO scores range from 300 to 850, and anything above 740 is considered good. If you can exceed 740, you’ll get great rates and lower costs on your borrowing. But establishing credit can be a Catch-22—if you haven’t established credit, then you can’t get credit. We have another post about that conundrum, but basically, once you start establishing a credit history, you’ll gradually improve your score.

What goes into your credit score?

Good credit is earned by managing your cash flow appropriately, and so the credit rating agencies look to see that you’re doing so. Payment history accounts for more than one-third (35 percent) of the score. Another 30 percent is based on the amount that you borrowed, 15 percent is based on the length of your credit history and the remaining 10 percent is based on the type of credit you’re using.

If you’re not sure what your credit score is, there’s a free report you can get annually from annualcreditreport.com. There’s also the Fair Credit Billing Act, which allows you to go after the three kings if there’s a credit dispute or an error on your record. If so, the Three Kings have to expunge and/or correct those mistakes.

How else can you establish a good credit rating?

  • Make your payments on time.
  • Don’t tap into more than 30 percent of your total credit limit.
  • If you have installment or revolving credit, make sure you have all errors corrected on your record.

Ultimately, a higher FICO score means lower interest rates for you, which lowers your borrowing costs, which means better cash flow, which means building wealth more efficiently, which means making smart money decisions.

Until next time, enjoy. Gary

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