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Credit scores: Passports to money

Have you ever been on your way to the airport and then remembered you left your passport on the kitchen table? As the knot in the pit of your stomach grows, you realize you have to turn back because you aren't going anywhere without it.

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Something similar happens when you let your credit score drop: You aren't going to get very far in your day-to-day life without a stellar credit score. Your credit score is your passport to money—in the form of lower interest on loans, better deals on service and insurance contracts and access to better jobs and apartments.

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The bottom line? A higher credit score means you are less of a risk, which in turn means you are more likely to get credit or insurance and also pay less for it.

Finding a place to live: Let's say you decide to uproot and move to a new city. The first thing you would do is look for a place to rent or buy. Landlords often pull your credit report, and mortgage lenders place great weight on your credit scores.

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If your score is low and you are looking to buy, you may not qualify—or you may pay a higher interest rate to protect the lender against your possible default.

You will also need homeowner's insurance. Some insurance companies use credit-report information to help predict your likelihood of filing an insurance claim, sometimes called "insurance scores." This information can affect your eligibility and rates.

Setting up new utility accounts: You found your dream home, and you need to set up electricity, water, garbage and cable accounts. These companies will check your credit history. If you have credit issues, you could be required to pay a deposit or add a co-signer.

Finding a new job: You start filling out applications and notice that most ask for your permission to check your credit report. Federal law allows employers to do this, but they must get your consent and let you know if you were rejected on the basis of the report. Several states have passed laws prohibiting employers from pulling credit reports. To find out if your state is among them, visit the website of the National Conference of State Legislatures.

Financing a car: Your new job will require that you meet with clients regularly. You want to make a good first impression, and your 10-year-old Toyota won't cut it. If you don't have a good credit score, you may not be eligible for a loan or, even if you are, your rate will most likely be higher. Of course, when you buy a new car, you must buy insurance, as well. More than 90 percent of auto insurance companies use credit facts to decide terms.

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Cell phone service plans: You land your dream job and decide to treat yourself to the latest iPhone.

Right at the checkout counter, the salesperson will enter your application, which will include your Social Security number. You could be denied a service plan, be required to pay a large down payment or pay extra if you have bad credit.

Applying for a credit card: With the great salary you negotiated with your new employer, you realize that you can take better vacations. You see an offer for a credit card that has a mileage program. The credit card company will use your credit score to see if you qualify, and at what terms.

What's a good credit score?

Most credit scores run in the range of 301 to 850. Within that range, there are different categories, from bad to excellent. Various lenders may have different criteria and they may change.

Credit scores are computed based on mathematical models that analyze information in your credit reports. Credit scores compare factors such as payment history, debt levels and the age of credit accounts to figure out what consumers who pay their bills on time have in common. The goal is to predict how new and existing customers will handle credit. Here are typical ranges:

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: 599 and below

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There are some best practices you can follow to maintain a high credit score:

  • Pay all of your bills on time.
  • Keep the balances of your credit cards at 20 percent of the available credit or less. This refers to the "credit utilization ratio"—the lower, the better.
  • Apply for new credit in moderation; you don't want lenders to think you're credit-hungry.
  • Keep a healthy mix of credit – revolving, installment and mortgage.
  • Think twice about closing credit cards with high limits or with good payment history. This may eliminate part of your history and increase your credit utilization ratio.

Review your credit report regularly and, if you find incorrect information on it, contact the credit reporting agencies to get it corrected. Federal law gives you the right to get a free copy of your credit reports from the three credit reporting companies. You can also pay a fee to get your actual credit scores. Go to www.annualcreditreport.com or call 877-322-8228 toll-free.

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