Posted in Financial Tips
Why is a good credit score important?
Society is becoming increasingly dependent on using credit scores to make decisions. Not only is your credit score used to make financial decisions, such as applying for a credit card or mortgage loan, landlords also use your credit score to decide whether to rent to you. Your credit score may also impact your monthly bills. It may be shocking to learn that credit is needed to establish utility services, including cable, telephone and water. Additionally, many employers are starting to conduct credit checks as part of the hiring process. If you have not demonstrated financial responsibility, a potential employer may think twice about hiring you. Your credit score impacts many different aspects of your life, which is why it is so important to manage it appropriately.
How to improve your credit score
The sooner you start working on improving your credit score, the better. If you are looking to apply for a car loan or mortgage, the ideal time to start improving your score is six months to even a year beforehand. This gives you time to figure out if there are any gaps in your credit score and develop a plan to repair those gaps.
If you are not already part of a credit monitoring service, now is a good time to join one. Credit monitoring services such as CreditKarma.com or WalletHub.com allow you to check your score at any time – free of charge.
The number one complaint received by the Consumer Financial Protection Bureau (CFPB) involved incorrect information listed on consumers’ credit reports. Even worse, 26% of participants in a study by the Federal Trade Commission (FTC) identified at least one error on their credit report that could make them appear riskier to lenders. To ensure mistakes are corrected as quickly as possible, contact both the credit bureau and organization that provided the information to the bureau. Both these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act. Helpful tip: all three of the credit bureaus now accept the filing of disputes online, with Experian now only accepting online submissions.
Find out how to initiate a dispute online by clicking here.
Clean Up Credit Cards
In reviewing your most recent credit report, you should be looking at all accounts listed that are still open. If you have credit cards or accounts that are open but you no longer use, you need to ensure these accounts were indeed closed and your credit report gets updated accordingly. If you have credit cards with small limits that are open but you do not use, now would be a good time to have them closed. Having too many open credit accounts could appear risky to lenders and can have a negative impact on your score.
Conversely, if you have too few credit cards with low to no balances, cancelling those cards can have a negative impact on your credit score as well. The credit scoring system takes into account how much credit you have access to in comparison to how much you have borrowed. As such, if you cancel a credit card with a large credit limit and maintain a balance on some other cards with lower limits, this can hurt your score since now the amount of debt you have in relation to your available credit has gone up.
Consider the following list of credit cards Mary Jo has open. If she is looking to improve her credit score, which card(s), if any, should she close?
|Card||Current Balance||Credit Limit||Credit Card Utilization*|
|Credit Card A||$2,000||$10,000||20%|
|Credit Card B||$500||$500||100%|
|Credit Card C||$0||$750||0%|
|Credit Card D||$0||$10,000||0%|
*Credit Card Utilization = Balance ÷ Limit
Mary Jo would benefit most from closing Credit Card B, as she is using 100% of her limit. She may also consider closing Credit Card C as she does not actively use it. As detailed above, open credit cards with small limits that go unused could appear risky.
Speaking of Credit Cards, Pay Down Those Balances
As mentioned above, one major factor in your credit score is how much revolving credit you have versus how much you’re actually using. There is no hard and fast rule as to what credit card utilization you should maintain; however, some experts have suggested a utilization between 1-25%. To boost your score, pay down those balances and keep them low. Set a goal to pay off your credit card balances each month, as this reflects favorably in your score.
Don’t Apply For New Credit
Research has shown if you are looking to apply for a mortgage or car loan, it is best if you do not apply for any credit (unless absolutely necessary) for at least six months prior. You should avoid opening any new credit card accounts or store charge cards as recent inquiries on your credit report and any newly opened credit accounts can hurt your score.
Make Timely Payments
Payment history can account for up to 35% of your credit score. One late payment can drop your score very quickly, especially when you have a high credit score. If you’re in a financial pinch, it is better to pay the minimum amounts required on your accounts. While paying the minimum amount will not necessarily help you pay down your debts, missing a payment does much worse damage to your credit score than having high balances on your credit lines. By always paying on time and paying at least the minimum amount, your credit score will recover as your debt utilization declines.
Medical Collections Matter
Open medical collections can severely impact a person’s credit score. A collection can knock off more than 100 points from your credit score and can remain on your credit report for seven years. Additionally, paying off a collection has no bearing on your score – the length of time since the debt was assigned is what matters. Collections can unfortunately happen to anyone, whether you are already managing your credit responsibly or have hit hard times financially. The best way to avoid collections is to focus on prevention and monitor your accounts regularly.