Managing and Improving Your Credit Score

There is an endless amount of information, on the web and from leading financial magazines, covering the management of your credit and improving your credit score. One thing is for sure, they can all be boiled down to a handful of useful ways that you can affect your credit rating and make no mistake about it, better credit is well rewarded and is vital to your financial health. As an example, based upon today’s prevailing rates you would save $ a month or $ a year in interest paid on a $250,000 mortgage loan if you could raise your credit score from 600 to 720.

Since your credit score (see “What is a FICO score?” for details on the most widely used credit scoring system) reflects a rating of your credit history at a point in time, your credit score will change whenever something changes in your credit history as reported to the credit agencies. Given that your credit score is determined by analyzing five basic categories which consist of: 1) payment history, 35% of score; 2) amounts owed, 30% of score; 3) length of credit history, 15%; 4) new credit, 10%; 5) types of credit in use, 10%; you can see why most of these experts dig deep and come up with the, tough to grasp, suggestions to pay your bills on time and don’t charge a lot of debt. You cannot affect your credit score any easier than by just paying your bills on time and not charging a lot of debt. But, ok, maybe you’ve blown it a little and your credit score has suffered. With the FICO credit score ranging from 300 to 850, and a 680 credit score often considered the bottom of the “A” rated, or highest rated borrowers, you may have a little work to do to get into the upper tier of borrowers.

First, let me warn you to stay away from any credit repair organizations that promise to have valid negative information removed from your credit reports. Most often these companies make big promises, can’t deliver on those promises, but keep your money. Credit reporting agencies will not remove negative information if it is valid and if it is not beyond a lengthy period of time such as 7 to 10 years old.

To start the credit review process, you need to request a copy of your credit report from each of the three credit reporting agencies, Experian, Equifax and TransUnion. You are entitled to one free credit report each year and I encourage you to review your report regularly. Click here to print a request form for your free credit bureaus. Though you are not entitled to a free credit score you may order your credit score, for a fee, from Fair Isaac’s site, www.myfico.com should you be interested in what your scores are. Again please see my article on “What is my FICO?” for more details.

Once you have your credit reports in front of you, take time to review them for inaccuracies. With the credit report, comes a dispute form for you to complete and send back to the agency along with proof of payment of the item in question. The agency will contact the lender in question and verify that the item is paid in full and, if so, the credit reporting agency will adjust your file and your credit score will likely improve. Keep in mind that you will need to complete this dispute form for each of the three agencies showing the error. It is as simple as that. You certainly do not need an expensive credit repair company to help you fix items on your credit report that are incorrect.

As far as improving your score based on the remaining items on your report, here are some of the top considerations affecting your credit score in each of the top five weighted categories:

Payment history (35%)

-Sorry but this is the most heavily weighted and the one where, it is what it is. The only way to affect your credit history here is to pay your bills on time. If it is in your control, get payments back on track and, after making 6 or 7 timely payments on each account, your credit rating will start to improve.

-30-day delinquencies hurt more than 60 day delinquencies and 90 days hurt more than 60 day accounts. If you are having financial hardships, first off all contact your lenders and work out a payment plan thereby making some payment each month and try to avoid any of your accounts ever getting 60 to 90 days in arears.

-If you have to choose which accounts to let slide, your mortgage should always be paid first as mortgage lenders always weight how your primary bill is handled. Secondly, I would prioritize your auto loans, and lastly revolving debt.

-Be aware that paying off a collection account, or closing an account on which you previously missed a payment, will not remove it from your credit report. Your FICO score will still consider this information, because it reflects your past credit pattern.

Amounts owed (30%)

-Owing money on credit accounts is not a sign of a high risk borrower. However, having a balance near to the limit or near to the opening balance does negatively affect your credit as it hints at being overextended.

-Please note that even if you pay off your credit cards on a monthly basis, if you always charge $2,000 each month and though pay it off, your account balance on your credit report will show your average daily balance which may be close to the $2,000. You would be better off having two cards and alternating them every other month to allow a full pay down reported each month with no running balance.

-Keep balances low, in fact, on revolving debt always try to keep the amount owed to 30% or less of the balance. Your score would be higher, in fact, if you had $5,000 spread out with $2,500 on each of two $10,000 balance accounts than it would be if you had all $5,000 on one $5,000 limit card. The second scenario raises the red flag that you may be overextended.

-Do not request to have your credit line limit lowered. Learn to manage your debt and not to max out your cards. Lowering your limit will impact the percentage of money owed in relation to your limit as previously discussed.

-Never finance a new auto just prior to applying for a home mortgage. Again you would have a loan limit very close to the opening balance and this would weight negatively on your score.

-Don’t open a number of new credit cards that you don’t need just to increase your available credit as this might backfire.

Length of Credit History (15%)

-Longer credit histories will generally increase your credit scores. With that said closing an older account such as an old credit card account that carries a higher rate than the new promotional card you just got in the mail would hurt your credit score. Keep the old account open and use it occasionally to maintain the history of the established account.

-If you are just starting to build a credit history, don’t open a lot of new accounts too rapidly.

New Credit (10%)

-Don’t open accounts that you don’t need. If your credit is in the high 600s don’t open charge cards just to get 10% off on your purchase. Your credit rating may suffer and cost you significantly more should be shopping for a mortgage or auto and get a resulting higher interest rate due to your credit score falling below the lenders criteria for the best rate.

-The length of time since you initiated the last credit inquiry may affect your credit score.

-Playing the credit card game of rotating balance from one low cost promotional credit card offer to the next may reduce your interest expense for a while, however, it will have a significant negative impact on your credit score. First of all, you likely will be maxing out the card which is a no-no, secondly it is a new account, thirdly there is no credit history associated with the account followed by a resulting new inquiry into your credit. Change your spending habits, pay off debt as soon as possible, and don’t move the debt around.

-With that said if you are shopping for a car or home mortgage, all inquiries within a 45- day period are considered one request and will not adversely affect your credit score. You are always encouraged to shop for the best deal. Keep in mind, however, the second company pulling the credit score will have a slightly lower score (approximately 5 points) reflecting the credit inspection of the 1st lender. Subsequent lenders within the 45-day window will show the credit scores of the second lender.

-You are never penalized for checking your own credit or for lenders who you have not authorized to see your credit file such as those presenting pre-approved offers, etc.

-If you have had credit problems re-establish your credit history as soon as possible.
(See my article - “your credit is for sale” for important opt out information on the sale of your credit information to third-party solicitors.)

Types of Credit in Use (10%)

-Don’t open credit accounts that you don’t need, however, your credit score will reflect the mix of account types that you have from mortgage debt, installment debt, retail accounts, finance company accounts, and revolving debt. Opening accounts that you don’t need just to raise your FICO score will probably not help as it is payments over time that builds a credit history, and some types of debt may actually have a negative impact.

-Have credit cards but manage them effectively, owing less than 30% of the limit and keeping total balances low. Pay them off monthly if at all possible.

I encourage you to contact me with any questions concerning your credit or to work with myself or my staff to review your mortgage options.



Related Links:
Your Credit
Disputing Items on Credit History
Obtaining Your Credit Report
Your Credit History is for Sale