As an adult, there will be many numbers that are important to you, but arguably none more important than your credit score. Your credit score can affect your employment, your transportation, where you live, an so much more. In this article, learn some effective strategies for managing your credit score.
What Makes Up a Credit Score?
Ever wonder how a lender can make a decision about whether or not to lend you money based on your credit report? Your credit score (and history) can indicate your likelihood to repay a debt and is reviewed by creditors to determine your credit worthiness.
Your credit report is factored from an intricate algorithm – measuring amount of debt, current balances, payment history, and types of loans, then compared to millions of other people, and given a number. The credit scale runs from 300-850, with 300 being the lowest, and 850 being the highest. Below is a general breakdown of factors that affect your credit score
- 35% – Payment History
- 30% – Amounts You Owe
- 15% – Length of Your Credit History
- 10% – Types of Credit Used
- 10% – New Credit
What Affects Your Credit Score?
Every time you inquire into your credit report, your score is brought down. This is because it looks as though you are taking on new debt. The longer your credit history is, the better. Ideally, no late payments are best.
The amounts that you owe are also a factor. Credit companies will like to see that you are able to obtain credit, and handle monthly payments, but they do not like to see maxed out credit cards. Revolving and installment accounts are great, as they show that you are able to meet obligations month after month.
Generally, a bankruptcy will remain on your credit report for 10 years, and other information will remain for 7 years. Your credit report will also include information such as date of birth, previous employers, judgments, bankruptcies, foreclosures, and previous addresses. Most services are based on credit scores, and even some jobs.
From applying for a loan, to applying for insurance, your credit score will be a factor, and can be the difference of paying tens of thousands of dollars in interest in your lifetime.
So What’s your Credit Score?
There are three credit reporting agencies – Equifax, Experian, and TransUnion. By law, you are entitled to a free credit report from each of these agencies every 12 months. It is well worth your while to look at your credit reports at least once a year, to ensure accurate information is being reported about you. It is estimated that a staggering 79% of credit reports contain errors.
If you do find a discrepancy, you must contact each agency, and notify them of the change, as they do not automatically update. It can be a long process, but definitely worth money saved in the long run. You will want to request a report from each agency, as they do not report all the same information. You can contact these agencies to request a credit report, or dispute an account at: Equifax www.equifax.com Experian www.experian.com TransUnion www.transunion.com
What to Look for on Your Credit Report
- Incorrect or incomplete personal information: Name, address, phone number, social security number or birth date, missing, incorrect or outdated employment information and also check for incorrect marital status (for example, a former spouse listed as current spouse).
- Outdated items past their statute of limitations:
- Bankruptcies older than 10 years.
- Lawsuits or judgments, tax liens, criminal records or delinquent accounts more than 7 years old.
- Inquiries over 2 years old
- Account details and status: Make sure your accounts, credit limits and balances are listed correctly; If YOU closed an account, it should say “Account closed by consumer.” If a credit limit is not posted accurately this can lower the score.
- Accounts you don’t recognize. If you see a credit account you don’t recall opening or charges you haven’t made, this is something to be taken very seriously, as it may be an indication of Identity Theft.
- Delinquencies you didn’t cause.
- Duplicate Accounts. Once in a while, an error may be made that may cause a legitimate credit account to be listed more than one time on your report. These are fairly easy to catch, as they will appear identical. The problem is that they will contribute to the total debt owed and number of active accounts.
- Inquiries you don’t recognize or that are over 2 years old. Inquiries must be authorized. They also should disappear from the report after 2 years.
Correcting Errors on your Credit Report
So you have obtained your credit report, and discovered errors. What’s next?
Make notations of all erroneous information on your credit report. You will need to write a letter to each credit agency that is reporting the incorrect information, explaining the dispute. Include any supporting paperwork, and request they investigate the issues. Always send a copy, and keep the originals. You will also want to send a similar letter to the creditor that is reporting the erroneous information about you.
The credit agencies will have to start an investigation, including contacting the creditor in question. If the creditor cannot verify that the negative information is correct, it must be removed. Sometimes, this does not happen on the first try, so it is up to you, the consumer to make sure it gets completed. If you are not able to have the errors amended, you are entitled to a 100-character explanation next to each derogatory item, explaining your side of the story. Once the report has been completed, you are entitled to a free updated copy of your credit report from the credit agency.
Rebuilding your Credit
Now that you have looked at your credit report, and fixed any errors, it is time to start rebuilding! Your goal while rebuilding your credit score should be to accentuate the positives of your credit profile – rent paid on time every month, a long, prompt history with a certain creditor, etc.
To start showing creditworthiness, you will want to look for 2 or 3 credit cards. You do not want to spread yourself too thin with many different cards, as it gives you temptation to charge them to their limits. Also, having just a few cards shows that you are diversified, and have the ability to maintain credit without maxing yourself out, and meet monthly obligations as they come due.
As a general rule, credit agencies like to see that you are carrying a balance of no more than 40% of your limits. This shows you can handle the credit given, and pay the debt monthly. If you are not able to get approved for a traditional credit card, you can look into a secured credit card. This will require you to deposit a sum of money, and your credit limit will be equal to this amount.
You can also look into a small gas card, or department store card. Be sure not to use these just because they are there- use them occasionally, and always be sure to make monthly payments on time! You can also look into adding a co-signer to your account. This may help you to get approved for a new account, but your co-signer will be equally responsible for the monthly payments, and the full balance of you were to default.
Tips on Building a Credit Score
- Pay your bills on time every time!
- If you have missed payments, get current and stay current!
Paying off a collection will not remove it from your report. It will show as paid, but will remain on your report for 7 years.
- Keep balances low on credit cards – do not max yourself out!
- Don’t open a number of new credit cards that you do not need
- Do your rate shopping within a focused window of time
- Credit scores can distinguish between many single requests, and shopping for the best interest rate.
- Create a budget so you know where your money is going every month.
- Pay yourself first! Open a savings account, and commit to adding a certain amount every month.
- Keep a spreadsheet of all credit cards and debt. Check your monthly statements to your records to prevent identity theft, and paying unauthorized fees.
- If you are having trouble meeting your monthly payments, contact your creditor immediately! They may be more forgiving if you are upfront with them, and tell them your situation. Many companies would rather work out a payment plan with you than see the account in default.
- It’s ok to check your credit report. It is the best way to ensure credit agencies are painting an accurate picture of you.
For any additional questions about your credit score, or to see if you qualify for a mortgage loan, contact Lyn today!