How to improve your credit score and ensure financial health
Just as a physician might rely on certain numbers (weight, blood pressure) to help determine your physical health, financial institutions, creditors and lenders also look at numbers to help assess your financial health. Specifically, they look at credit scores. A credit score of at least 700 will help you obtain better rates on any loan, and can help in many aspects of your financial life.
Do
- know where you’re starting from
- review credit reports for accuracy
- pay bills on time
- pay down debt
- use credit
Don't
- live beyond your means
- cancel a credit card with a long (positive) history
- think you’re off the hook if you don’t have a credit card
- disregard a secured credit card
- turn to credit repair
Do know where you’re starting from
Consumers can access credit reports once each year for free at annualcreditreport.com or by calling 877-322-8228. A credit score involves three scores from the three major credit reporting agencies – Equifax, Experian and TransUnion. The institutions calculate the scores with complex formulas that incorporate data from your credit reports. Each of the three agencies creates a credit report, which is a detailed listing of your entire debt payment history, including creditors, loan amounts, highest balances, available credit, missed payments, and whether the account is in default, open or closed (and who closed it).
Do review credit reports for accuracy
If the credit reports show any inaccuracies – from address to an incorrect outstanding balance on a credit card – correct them by following the directions on each agency’s website. Under terms of the Fair Credit Reporting Act, the agencies must investigate any disputed items and remove them from the credit report if they cannot be verified.
Do pay bills on time
On-time payments are the most important factor in developing good credit, accounting for 35 percent of the score. Paying bills on time for as little as one month can raise a modest credit score by 20 points. It’s not only credit card payments. Pay every bill on time and as much as possible, in full.
Do pay down debt
Work to minimize percentage utilization and maximize credit available. If you have a credit card with a limit of $10,000, and you owe $3,500 on it, that's 35 percent utilization. Anything over 35 percent is considered is high and can impact credit scores. Over 50 will have a definite negative impact on a credit score, and a maxed-out card will very negatively impact the score.
Do use credit
Some people may be tempted to avoid borrowing or charging anything. The credit agencies rely on past payment history to gauge how borrowers will do in the future. If you don’t borrow, they have no information to rely on. However, be cautious with store credit cards. These cards often have very high interest rates. They also sometimes are issued by finance companies, which can, in some cases, have a negative effect on credit scores. Most people are better off using a regular credit card.
Do not live beyond your means
When it comes to credit scores, this means charging only what you can pay off in full each month. If you can’t do that, don’t buy it and don’t charge it.
Do not cancel a credit card with a long (positive) history
Think carefully before taking this step, because the longer you hold a card, the more valuable it is in your credit score determination. While most adults need to carry one credit card for personal business, it is not necessary to use more than one. If you need to, freeze cards, put them in a safety deposit box or store them at your mother’s home so you won’t use them. But don’t automatically close the accounts.
Do not think you’re off the hook if you don’t have a credit card
On-time payments on a student loan or car loan, and on rent, phone, Internet and utility bills, will help build a credit history.
Do not disregard a secured credit card
This is a credit card typically issued to people with no credit or poor credit. The borrower must make a deposit, and credit card charges are applied against the deposit. If you are using a secured card to build (or rebuild) credit, confirm that your spending and payments will be reported to the credit bureaus.
Do not turn to credit repair
This term often refers to services that work to achieve a temporary improvement in a consumer’s credit score by disputing items in the individual’s credit file. Once a dispute has been filed, the burden is on the credit reporting agency to remove or suspend that account from the consumer’s record until the dispute has been resolved one way or the other. This action can provide temporary relief from adverse items in the file.
Valid disputed items will be permanently removed from the credit report. However, if an item in dispute is not valid, or is resolved in favor of the creditor or lender, it will go right back on the file in about 60 days. Some people will go to a credit repair agency specifically trying to achieve a temporary increase in a credit score in order to up their short-run chances of getting a loan. It is akin to having a flat tire and putting a temporary patch on it – and expecting the car to run perfectly into the future with no additional attention. And if a loan lender does some research, that lender will uncover the disputes and see what is going on.
Services that offer “credit repair” do nothing that consumers can’t do themselves. They can be expensive, and do not solve the root problem of why a consumer’s credit is poor.
Summary
Beyond financial institutions, potential employers, landlords and even cell phone providers may look at your credit score to determine whether you’re a good credit risk. Credit scores also play a part in determining how much of a down payment you need to make when renting an apartment or turning on utilities. Pay attention to your credit – It will pay off.
