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Trying to raise your credit score is something you might not give much thought about until it’s too late. Suddenly you need a new car, so 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.
What is a Credit Score?
Your credit score, or FICO score is what stores, banks, finance companies, insurance companies or government agencies use to determine your credit worthiness – or your ability and likelihood that you’ll make payments on time.
Your score can be anywhere from 300 to 850. An excellent score would be about 750 or higher. Anything between 700 and 749 is considered good. 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.
Here’s How Your Score is Generally Interpreted:
What Affects Your Credit Score?
What hurts your credit score are the usual late payments, and of course, bankruptcies. But also, how you use your credit has a big impact on your score.
A general rule of thumb is, you shouldn’t use more than 30% of your available credit. In fact, about a third of your credit score is comprised of your credit utilization.
For instance, if I have a store credit card with a limit of $1200, I should make regular payments, and also try to keep the balance below 30% or $360.
Creditors don’t send reports to the credit agencies every single month. But if you make a purchase that raises your utilization to 50% of your limit, and they report your history that month, your score will decrease.
Even if you usually pay on time, in their eyes, you’re over-extended so it’s a good idea to plan your purchases to avoid that situation.
Get it Before You Need It
It’s a good idea to request your credit report 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. If you do, you can close them and then contact the credit agency and request their removal.
Stores may also report that you were over 30 days late with certain payments. It may have been just an oversight, but getting the report lets you see exactly what any potential creditors are seeing about you.
If you see anything you don’t agree with and can send them written documentation that proves otherwise, they’ll have to remove it.
How to Check Your Credit – And 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 just have to request it.
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.
One way to get the reports, is to visit www.annualcreditreport.com or call 1-877-322-8228.
Annual Credit report will give you the summary of your credit, but they won’t provide your credit score unless you pay them for it. It’s important to know your score because that’s 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. I’ve signed up and saw right away that it contained two mistakes that I was able to correct and raise my score. They offer credit counseling if you’d like to take advantage of that also.
Another benefit I like, is that I can go back periodically and re-check my score without negatively affecting the score. Credit Sesame does a ‘soft inquiry’ that won’t affect your score in the same way that a credit check from a potential creditor would.
How to Raise Your Credit Score
Once you have your credit score, check each account to identify the ones that are negatively affecting it. Depending on the reason, there are various ways to resolve the issue and in turn, raise your score.
If your credit utilization is too high – That 30% utilization ratio would be used for individual accounts and for your total credit utilization. So for example, if you have 3 credit cards, each with a $1000 credit limit, and you’ve charged $700 on one, and nothing on the others, your utilization overall is ok, but you’d be reported as over utilizing your credit on the one with a $700 balance. In that case, you’ll want to do everything you can to bring your balance down to under 30% or $300 for that account.
You Can Request a Goodwill Adjustment – If you generally have a good payment history, but you notice on your report that one account has a late payment reported, you can contact the creditor and politely ask that it be removed. Just show evidence of your prompt payment history and state that you’ve been a loyal customer, and they might remove it. They’re not required to, but as a gesture of goodwill, they might just remove it.
You Can Sign Up for Automatic Payments – I don’t usually favor automatic payments on credit card debt, because I like to be reminded of it each month. I want to feel the pain of writing out that payment so it motivates me to eliminate it.
But if you’ve missed several payments and it’s starting to negatively affect your credit score, one way to request that the creditor remove the negative marks, is to offer to sign up for automatic payments. Again, I personally wouldn’t want to normalize credit card payments by automating them, but for an account with some delinquencies, it may help to eliminate it quicker and improve your credit score.
You Can Dispute Late Payments – If something looks inaccurate, check your own records. And if you can show evidence that you did in fact, pay on time, send copies of your own records to each of the credit reporting agencies that show the negative payments and request that 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 Work With a Credit Repair Agency – Be wary of paying for credit counseling, because they cannot have negative information removed unless it’s proved to be inaccurate. You can accomplish much of what they’d do. 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.
Hold Off on Applying for New Credit – If your score was negatively affected by hard inquiries, try holding off on applying for any credit or bank loans for awhile. A negative mark on your credit score caused by a credit check should drop off within 2 years. Each time that happens, your score will increase.
Pay On Time – Obviously, the single best thing anyone can do to improve his/her credit score over time is to pay bills on time every month.
Increase Your Income – If you’re over-extended with credit and can’t seem to make a dent in credit card bills, increasing your income may be the only way to eliminate debt and increase your credit score.
We’re all busy, and the last thing you may want to do is work more hours, but living paycheck to paycheck for years at a time, hurts more than most people realize.
The only way to be financially comfortable in retirement is to save enough money early enough to let the magic of compound interest grow your money. Extending credit card payments for decades while putting off savings is essentially, spending your retirement money now.
Here are some great ideas if you need to start bringing in extra income:
- 21 Ways Students Can Earn Money Online
- 25 Ways to Make Money This Month
- How to Save $1000 by Christmas – Without Working More Hours
- How We Save Over $100 per Month on Cable – and Still Watch the Same Content
- Kick Debt to the Curb Once and For All.
It Takes Persistence
The bottom line is that it takes consistent attention to increase your credit score. It may seem like a late payment here and there doesn’t hurt, but when several of them are reported, you’ll pay for it. Literally.
Here’s another reason to keep on top of your credit score:
One of the main reasons people aren’t prepared to retire, is because of the over-use of credit throughout their career. The money you’re paying for credit card debt month after month, year after year, is literally your retirement money. By remaining in debt for a decade or two, it’s very hard to fund a retirement account.
By keeping on top of your credit score, you’ll be aware of over-utilization, late payments and be motivated to reduce your debt.
Remember, just like your net worth is the easiest way to calculate your own financial health, your credit score is how everyone else judges your financial health. Check yours today because it’ll save you money tomorrow.