What you don’t know about your credit score could hurt you – what you need to know.
There are three credit bureaus — TransUnion, Experian and Equifax.
Each of these credit bureaus compiles its own credit report based off your financial history and credit history.
FICO, or the Fair Isaac Corporation, in turn makes a credit score based off the information in your credit report — which means you also have three credit scores.
Your credit score is most often calculated using the FICO scoring model, and is derived from information compiled by credit reporting companies.
Your personal credit reports at these companies include a history of your repayment habits regarding money you have borrowed or purchases you have made using credit.
Credit scores range from 300 to 900; a credit score above 700 indicates that you manage credit well and a lender is likely to be comfortable making a loan to you.
A credit score lower than 700 indicates that you may have mismanaged your credit, making you more of a risk to a lender.
If a lender lends money to you despite a low score, you may be required to pay a higher rate of interest on the loan.
You should check your credit score and credit report regularly
If you are only monitoring your credit score once or twice a year, you need to kick it up a notch.
20% of Americans have wrong information on their credit report
According to the FTC, 20% of Americans have erroneous information in their credit report.
Sometimes it’s just something little, but all too often it’s much more. In fact, many people have had their information completely mixed up with someone else’s.
Fixing errors on your credit report is possible, but it does take time (2-3 months, if not more). So it doesn’t negatively impact your life too much, it’s important to start the process as early as possible.
You don’t want to be denied an apartment, auto loan, or mortgage loan because of someone else’s mistakes.
1 out of 15 People are Victims of Identity Theft
And the number is growing.
Sometimes errors are made by mistake, but sometimes they happen on purpose. Monitoring your credit report and credit score can help you stay on top of your digital identity.
See a credit card application you know you didn’t do?
Or an address you never lived at?
Look for unexplained dips in your score and unusual activity on your report, both of which will suggest someone has stolen your identity.
Of course, there are companies out there you can pay to do this for you, but no one can protect your financial health better than you.
You will probably need to apply for credit someday in the future
Though you should always work on strengthening your savings account and monthly finances to cover emergencies, when the time comes you may not want to spend it all to cover the event or purchase (after all, there’s always something else around the corner).
By consistently monitoring your credit score, you’ll start taking note of how your actions are affecting your report and score, and will start doing what you can to make both stronger.
When the time comes, you’ll be able to replace your car, apply for a loan, or take out a new mortgage in a new state without any credit-related hiccups.
At the end of the day, you never know what life is going to throw at you.
A strong credit report and credit score can help better prepare you for the future.
As an example, here’s how your credit score can affect your home loan interest rate
The interest rate that you qualify for will depend, in part, on your credit score, as this score is a means of determining the likelihood of your repayment of the loan based on your past credit actions.
Your credit score is a measure of your financial health and indicates to lenders their level of risk in lending money to you.
A high credit score suggests that you are likely to repay your loan on time and may qualify you for the best — lowest — interest rate offered by that lender.
Conversely, a low credit score suggests that you might submit late payments or even potentially default on the loan. In this case, a higher interest rate is offered to offset the lender’s risk.
A difference of only a few points on your credit score can add hundreds of dollars to the cost of your mortgage
For example, a 30-year, $220,000 loan at a 4% interest rate without any other fees would have monthly payments of approximately $1,050.
However, the same loan at a 5% interest rate would have monthly payments of $1,181.
The difference of $131 per month adds up to $1,572 extra paid on the loan…
…in interest alone…
in a year’s time, an extra $1,572 because of a single percentage point on your interest rate.
Raise the interest rate to 8%, and you have a mortgage payment of $1,614 — an extra $564 per month over the 4% rate.
Over the life of the loan (30 years) this is an additional $203k in additional interest that you would pay at 8% versus 4%.
Your credit score is a HUGE component when purchasing a home or applying for any line of credit.
You can optimize your score, and you should start now, before purchasing a home or taking out any kind of loan
How you can take control and improve your credit score
To improve your credit score will require a variety of attacks, so you need more than one trick up your sleeve if you want to see big improvements!
The basics on how to improve and keep a higher credit score
First and foremost, pay your bills on time, every time!
A line of credit is only as useful to your credit score as your ability to make timely payments, so make sure that you are making your credit card payments on time.
If you are scatterbrained and prone to forget, most banks will let you set up automatic payments on your credit card, so you are guaranteed to pay on time as long as you have enough money to make the payment.
One of the most efficient ways to use a credit card is to set up automatic payments for a few household bills, then set up an automatic payment from your bank account to your credit card.
Second, get your credit report
Once per year, you are entitled to receive a copy of your credit report for free from each of the two main credit bureaus.
The number on your report will tell you whether your credit score is high, average, or poor.
The report will show negative incidences due to late or unpaid bills.
If you’re having trouble understanding your credit score, ask someone at your bank for help. Your bank representative can also help you find solutions to raise your score to where you want it.
Third, dispute mistakes
If you keep good records of your payments, getting the mistakes removed is usually a fairly simple matter of calling the debt issuer and providing some kind of proof that you made the payments on time.
If you’re friendly on the phone and have a good history with a particular lender, you might even be able to persuade them to remove one or two actual late payments from your report, especially if you can promise a large payment in the near future.
Fourth, get a new line of credit
You can’t improve your credit score if you don’t have any credit to work with.
Credit cards can be easy to abuse, but responsibly using a line of credit is one of the simplest and most straightforward ways to build a positive credit history.
If your credit score is already high, you can find a credit card with benefits, such as air miles or cash back, but even if you are simply trying to improve a poor credit score, there are options available.
Many banks offer a secured credit card as an option for rebuilding credit, which gives you a line of credit equal to a security deposit you pay to the bank.
If you use the line of credit responsibly, you can get the credit increased or get your deposit returned, though this usually takes at least a couple of years of balanced spending and repayment.
Fifth, use your line of credit wisely
Your credit score is not just calculated based on whether you pay your debts and bills on time.
It also takes into account how much debt you have, and how much of your available credit you are using.
The more credit you use, the greater a financial risk you are, so try never to use more than 30% of your available credit at any given time.
It’s easier to repay and better for your score when your creditor reports it. It will also leave you plenty of credit to use in case a genuine emergency arises.
Once you have the basics covered, here are some additional steps you can take to boost your credit score even more
Pay your bills twice a month
It’s OK to use your credit cards even when you are building your credit score, but the trick is you have to pay them off each month. Twice.
Most people who routinely max out their credit cards do so to get rewards points.
They think that, as long as they pay off the card each month, that they are only helping their credit score.
The problem is that they might be unknowingly hurting their credit utilization category.
If they have a $2,000 credit card, and they routinely max it out, they could be at the maximum end of their credit utilization on each report to the bureaus— regardless of the fact that they paid it off two days later. On the report it’s a 100% credit utilization each time.
There isn’t a clear-cut date when credit cards report your balances to the three credit bureaus. Most credit cards report your balance to the bureaus on your statement closing date, while others may report it on a daily basis.
Unfortunately, there’s not a rule when they have to do it. To help your credit score, pay off the balance twice a month, at the middle and the end.
Become an authorized user
When you become an authorized user on a credit card, you get all of the credit history that is associated with that card. This is why it’s paramount that you only become an authorized user on a card that has a good credit utilization ratio and one that doesn’t have any late payments.
You want a card that can only help you! (Note: This is a great way to quickly establish credit, too!)
Request credit increases
Requesting a credit increase is easy, and can usually be done online. If not, you can just call customer service. The decision usually happens instantaneously.
The reason you want a credit increase is for the credit utilization. Say it’s the only card you have, it has a $4,000 limit, but you currently have $3,000 on it. That would be a credit utilization of 75%.
However, if you got an increase to $5,000, that would drop your credit utilization down to 60% (a 15% improvement). Every little bit helps.
Note: If you are right on the cusp of getting into a new credit category, hold off. Credit limit increases usually come with hard inquiries, which can hurt your credit score by 5-10 points.
Open a new account
As with requesting a credit increase, opening a new account will increase your credit utilization and, in turn, increase your credit score. Use it just enough to keep it open, but don’t max it out.
You only want it for the credit utilization.
With a 75% utilization rate on a $4,000 card, opening another $4,000 credit card would drop your credit utilization to 37%.
Again, you’ll have to deal with the hard inquiry on your report, but the drop should be negated by the large utilization improvement.
Also, hard inquiries only stay on your report for two years. After that, they disappear— plus you’ll be getting the positive utilization report every month.
Note: HELOC loans work well for this, too. Shop around for lenders who are lending at the best rates.
Don’t just use one method
To improve your credit score will require a variety of attacks, so you need more than one trick up your sleeve if you want to see big improvements!
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