Improving Your Credit Score

Rick Welch: Dollars and $ense

Improving Your Credit Score

If you are planning to make a major purchase in 2017 like a new home or car now is a good time to work on improving your credit score. You might be surprised to learn your credit score may also be considered when you apply for a new job or insurance policy. The first step in the process is to order your credit report about 3 to 6 months ahead of when you intend to apply for new credit. Doing so will allow ample time for you to address any issues and for corrections to be reflected in the report prior to when the credit application process begins.  One frequent question is “What is the difference between a credit report and a credit score?”  The report is the factual history of your credit as collected by one of the three credit bureaus, Experian, TransUnion and Equifax. The role of the bureaus is to collect credit data and generate the credit report, not to judge your creditworthiness.  Companies like FICO evaluate your credit risk level (the likelihood that you will pay back principal and interest on time) and issue a credit score that can range from 300 to 850. As there are many different types of credit scores, it is best not to focus on the number rather where your score falls within the risk levels. The information included in your credit report together with your credit score will be used by a lender to approve or decline your application and, in some cases you may be charged a higher interest rate due to the risk you present as a borrower.

The two most important factors in credit scoring are your payment history and credit utilization rate. Presenting a track record of paying your bills on time is very important.  In general, keeping your credit utilization rate as low as possible (for a consumer under 25%) is a good idea. To calculate your rate, divide your credit card balances by your total credit card limits and multiply by 100. The lower your utilization rate, the more points you will earn and the better it will be for your credit score.  Keep in mind that credit reports separate credit history into four types: real estate mortgages (very important), installment loans – like for an auto (important), credit cards like Visa, MasterCard and American Express (still important) and retail cards from department stores (not so important).

Once you understand your credit score, what should you do?  First, do not assume that your credit report is without error.  Review it carefully, check for any mistakes and alert the applicable credit bureau, as necessary. Keep a small balance on credit cards and always make regular on time payments. Try to avoid making only minimum payments.  Bring any past due accounts current as soon as possible and clear up any collections pending, charge-offs or public record items such as tax liens and judgments. Minimize the number of credit cards you own and do not apply for multiple credit cards at one time.  Consider that while it may be prudent to cancel old credit cards, that action may actually lower your credit score.  When you cancel a credit card, your credit utilization rate rises to reflect the decrease in the total of your credit limits (while your credit balances stay the same). In addition, please remember that credit accounts open longer tend to have a more positive effect on credit scores than do accounts that have only been open for a short period of time. A closed account will, however, still appear on your credit report until deleted by the credit bureaus usually after about 10 years. 

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