You may have noticed that over the past few years television and radio ads increasingly involve discussions about credit monitoring services. In light of some recent data breaches, and as we pass the halfway point of the year, it might be a good time to take some inventory on the health of your credit score.

In life, typically the high score wins. This is especially true when it comes to credit scores. Since 1956 the Fair Isaac Corporation, or FICO, has been the determinant of how these scores are generated. A good credit score, generally considered to be above 700, can lead to preferred interest rates on consumer loans. A few big factors that impact this score are utilization rate, account history, and inquiries. Working in reverse order we will go over inquiries first. While you are shopping, let’s say you humor the nice clerk about a zero interest special they are offering on a new patio set and they need to pull your credit.

This will count as an inquiry, and every new inquiry is recorded. Too many of these may portray you as being too eager to borrow money and this can hurt your score. Think twice when signing up for anything that will result in a credit check. In terms of account history this is relatively straight forward. To receive a FICO score you need to have at least one account open for six months or longer that has been reported to the credit bureau recently. The longer these accounts have been open, the more benefit you will see to your score.

So if you think you should close some old accounts you may want to hold off for a minute. Closing old accounts can hurt your score. If you have a few open accounts with zero balances it may be more beneficial to keep them open. Third, and finally, is the utilization rate. This sounds like physics, but is actually quite simple. For example, you only have one credit card and your limit is $10,000. One expense leads to another and soon you have a revolving $3,000 balance on this card. Your utilization rate is 30%, meaning you have used 30% of your available credit. Anything above 30% starts to diminish your score.

Now, to check your credit score you have a few options. Most credit card companies will offer you a snapshot of your FICO score on their website. However, your true FICO score and the factors that influence it appear on your credit report. According to the Fair Credit Reporting Act, your credit report must be provided by each of the three credit reporting agencies once per year at no charge. Experian, Equifax, and Transunion are the three major credit reporting agencies that generate this report.

A good rule of thumb would be to log on to at least once per year to obtain your free credit report. This way you can monitor the number of accounts, payment history, inquiries, delinquencies, and other factors to make sure no one has used your identity to fraudulently obtain loans. For the overachievers out there, since this report is available by all three agencies once per year you could check one every four months to have ongoing monitoring throughout the year. In today’s world you can never be too cautious.

By TJ Stevenson, CFP

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