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Maintaining a good credit score is something you might not give much thought to until you need it.
Maybe you’re negotiating for a car, and you sweat it out while the salesman walks your credit info over to the finance manager.
He’ll decide whether you’re approved, and what rate you’ll pay. The better your score, the lower your rate – and payments.
The difference between a 780 rating and a 580 will add hundreds of dollars onto your loan due to a higher rate.
So here we’ll break down exactly what you need to know – what makes up your score, how to get it, and how to raise it.
Most creditors report their customer’s payment performance to one of the three main credit reporting agencies – Equifax, TransUnion and Experian.
These three credit reporting agencies evaluate your payment history, as well the types of credit you have, and assign a numeric score on a scale of 300 – 850.
Places like stores, banks, finance companies, insurance companies or government agencies will access your score when you apply for credit. This is how they determine whether you’re a good credit risk and what interest rate you’ll pay.
How is Your Credit Score Interpreted?
Your score is rated on a scale from 300 to 850. An excellent score would be 800 or higher. Here, you’d receive the lowest loan rates available.
Between 740 and 799 is considered very good, and would enable you to qualify for most loans at reasonable rates.
Below that, and you’ll be paying higher interest rates. And if your score falls into the 500’s, you’ll risk not being approved for credit, or be eligible for only secured loans.
Step 1. Know What Affects Your Credit Score
There are five factors that make up your score, each weighted differently. Here’s a breakdown of each area:
1. 35% - Paying on time
This one is self-explanatory. Credit agencies are looking to see if you’re able to pay your bills on time consistently.
Missing just one payment will affect your score more than any of the other four factors. So whether it’s a credit card, mortgage payment or a loan, paying on time every month is the single best way to establish good credit.
2. 30% - Credit Utilization
A general rule of thumb is to try not to use more than 30% of your available credit. Credit reporting agencies will look at your utilization two ways:
Individually: if you have a credit card with a limit of $1200, you’d want to make regular payments, and also try to keep the balance below 30% or $360.
Overall: Suppose you have 3 credit cards, each with a $1000 credit limit. You’ve charged $500 on one, $700 on the second, and zero on the third card. Credit agencies would see that as over-utilizing your credit on two individual cards, and overall because your $1200 balance exceeds 30% of your overall credit.
Once you’ve established yourself as a prompt payer with a particular account, you may want to call and ask them to raise your credit limit. Not so you can charge more, but to decrease the percentage of your utilization and possibly raise your score.
Businesses may not send reports to the credit agencies every single month, but since you don’t know when, it pays to keep close track of what you’ve charged on each account.
3. 15% - Credit History
Credit history looks at the amount of time you’ve had accounts open where you’ve established a pattern of on-time payments.
There’s no shortcut to boosting this factor. Unfortunately, it’s just a matter of using credit accounts responsibly over a long period — usually over several years.
My inclination was initially, to close accounts I’m not using regularly. But if there’s an account that you’ve established a good payment history with, it may help to boost your rating the longer it ages.
4. 10% - Credit Mix
Someone just establishing their credit might have a few department store cards, or maybe a gas card.
But a potential lender may want to see that you’ve handled several different types of credit successfully.
If they see you’ve established a regular payment history on things like a personal or student loan, a mortgage or a car loan, it’ll raise your score.
5. 10% - New Credit
The number of new credit accounts you’ve opened in the past year is a factor because opening several new accounts over a short span could indicate you’re in trouble financially, or that you’re over-extending yourself.
The reporting agencies would look specifically for hard inquiries – things like credit card applications, a car or personal loan, or a mortgage loan.
Soft inquiries – things like checking your own score, being prequalified for a credit card offer, employment checks or renting a car wouldn’t affect your score.
Step 2. Check Your Credit Score Regularly
It’s a good idea to get your credit report and familiarize yourself with it regardless of whether you’re planning to make a big purchase. You’re entitled to at least one free report each year.
You may be surprised to see credit accounts listed under your name that you thought were closed long ago. Or late payments that you thought were made on time.
Once you have the report, you can take steps to correct any inaccuracies, or determine whether you need to change a few of your own processes.
If you see anything you don’t agree with, and can send the creditor written documentation that proves otherwise, they’ll have to remove it.
Where to Get Your Score
There are three nationwide credit reporting agencies – Equifax, Experian, and TransUnion.
You’re entitled to one free report each year from each agency. You can do that at www.annualcreditreport.com, or by calling 1-877-322-8228.
You’re also entitled to a free report if you’ve been denied credit, insurance or employment. But you have to ask for it within 60 days of receiving the rejection.
The only downside of the Annual Credit Report site, is that they’ll give you a summary of your payment history, but not your actual credit score unless you pay for it.
It’s important to know your score because this is the key indicator that banks, creditors, utility companies, insurance companies or government agencies will use to judge your credit worthiness.
Another option to get your credit report and your credit score for free is through Credit Sesame. It’s not only free, but they don’t even require a credit card.
When I accessed Credit Sesame, I noticed two inaccuracies, both of which I was able to correct, which in turn raised my score.
One benefit of Credit Sesame is that you can go back periodically and re-check your score without negatively affecting it. This is considered a ‘soft inquiry’ that won’t affect your score in the same way that a credit check from a potential creditor would.
Credit Sesame will send an occasional email with tips on improving your credit, which will always contain an offer or two. This is how they’re able to offer their service for free. But I’ve never felt inundated with their emails.
Step 3. How to Maintain a Good Credit Score
Pay On Time
Obviously, the single best thing you can do to improve your credit score over time is to pay bills on time every month.
Whether it’s inserting due dates into your budget, your planner, auto-reminders, automated bill payers, or a scheduled budget/bill paying session – whatever works best for you.
You Can Dispute Late Payments
If something looks inaccurate, check your own records. If you can show evidence that you did in fact, pay on time, send copies of your own records to each credit reporting agency requesting they be removed.
The credit reporting agencies are required by law to respond to your request within 30 days, so you may even want to send your request by certified mail.
When the investigation is complete, the agency must report the results back to you in writing. If there was any change to your report, they’ll send you a new copy.
If you request, the credit agency must send notices of any correction to any business that received your report within the last 6 months.
Even if you dispute an item that does not result in them changing it, you can request that a record of your statement be kept on file.
You Can Request a Goodwill Adjustment
If you generally have a good payment history, but you notice one late payment, you can contact the creditor and politely ask that it be removed.
If you can show evidence of your prompt payment history and let them know that this was an exception, they might agree to remove it as a goodwill gesture. They’re not required to, but it’s worth a try.
Limit your Applications for New Credit
Each inquiry into your credit, which happens when you submit an application for credit, can drop your score by a few points.
Soft inquiries won’t affect your score – things like checking it yourself, employment checks, or companies prequalifying you for promotional offers.
Hard inquiries will affect your score – you only want to apply for new credit when you need it. The negative marks on your credit score caused by a credit check should drop off within 2 years. Each time that happens, your score will increase.
If you’re planning to take a loan out in the near future, you’ll want to limit other applications for new credit to avoid any dings.
You Can Sign Up for Automatic Payments
I don’t usually favor automatic payments on credit card debt, because paying it manually each month motivates me to eliminate it quicker.
But if you’ve missed several payments and it’s negatively affecting your credit score, you could try calling the creditor and offer to sign up for automatic payments in exchange for them removing the negative marks.
I wouldn’t make a practice of normalizing credit card payments by automating them, but for an account with some delinquencies, automating the payment until it’s paid off could help to improve your credit score.
You Can Work With a Credit Repair Agency
Be wary of paying for credit counseling, because even they cannot have negative information removed unless it’s proved to be inaccurate.
And if you keep good records, you can accomplish the same thing.
There are some free options, like the non-profit National Foundation for Credit Counseling. Another option is the free counseling offered through Credit Sesame.
Avoid signing any kind of credit consolidation loan that uses your home as collateral. It’s enough of a challenge to repair your credit score without losing your home in the process.
Increase Your Income
I know. Easier said than done, right?
But if you’re over-extended with credit, your credit utilization is over 30% and you’re struggling to meet bills, increasing your income may be the quickest way to eliminate debt and increase your credit score.
If a raise or overtime is out of the question, here are some side hustle options that don’t require experience, and can help you to start earning extra income quickly:
Check your credit utilization
Be careful not to over-utilize your individual accounts or your combined credit. If the reporting agencies see you consistently maxing out some accounts you’ll appear to them as high-risk.
If you do see that you’re using more than 30% of your available credit individually or as a whole, then paying it down is one of the quickest ways to improve your score.
Keep Good Records
The best way to avoid things like late payments and over-utilization of credit is to stay on top of expenses. Even if it takes several months to work out a budget, once you do, it’ll be much easier to avoid late payments.
Here are a few ideas that’ll help:
Step 4. Persistence Will Pay Off
I heard an opinion this week, that you shouldn’t be concerned with maintaining a good credit score, and that the idea of maintaining a good credit score is something that lending institutions promote to encourage borrowing.
That may or may not be true, but the person who expressed that opinion has an income that’s quadruple the national average, two homes owned free and clear, and multiple investments. He doesn’t need credit.
That’s a great position to aspire to, but unfortunately, most of us will depend on credit, at least in part, throughout our career.
- To rent an apartment, buy a home or apply for a loan.
- Or to refinance your home for a better interest rate.
- Even for certain job applications.
Life wouldn’t be much fun going to the other extreme either – by living your life to please credit agencies.
It just helps to be aware that how we handle money is being tracked, and the results will either help us or hurt us down the road.
So knowing what’s in your credit report, how it’s calculated, and how you can improve it will undoubtedly save you money.
How about you?
Have you had any issues with credit, and was there anything in particular that helped to resolve it?