Dan A. Mason asked: Ah credit, what a mysterious thing you can be. In a perfect world, the credit reporting agencies (Trans Union, Experian and Equifax) would give us clear cut guidelines as to how they calculate your credit score and convince us that there is a method to their madness. Alas, they leave us lost in darkness to fend for ourselves.
If you have ever had to deal with any of the credit agencies in correcting duplicates, outdated accounts or flat out erroneous information, you know this is no simple task. It is often a several month long, knock down, drag out contest of wills to see who gives in first. That being said, there are some specific things you can do to proactively improve your overall credit and therefore your credit score.
1) Knowledge Is Power
To begin to understand and improve your credit, you must first know where you stand right now. You are entitled to one free copy of your credit report per year. Go to annualcreditreport.com to obtain yours. Go through the entire report from each credit agency looking for errors, inconsistencies or omissions to ensure you know where you stand right now.
2) Get Up To Date
Many accounts will simply stop reporting to the credit bureaus once they are paid off. So, rather than showing paid in full with a zero balance, it will report the last balance prior to receiving the payoff. Be sure all paid accounts show paid in full, report a zero balance and show account as closed.
3) Inquire Within
Each time a creditor pulls your credit, it is reported on your credit as an inquiry. Inquiries generally remain on your credit for 90-180 days. Excessive inquiries can dramatically lower your credit score. It is important to only allow a company to pull your credit report after you have done your shopping and only if you are serious about opening an account with them.
4) Collections – Part I
Collection companies are notorious for listing the same collection account on your credit numerous times. This can trick the credit scoring programs into thinking you have more derogatory items than you actually do and therefore drag down your credit score. Be sure that any current or previous collections only appear once and the status of the account (outstanding or paid in full) is accurate.
5) Collections – Part II
If you do have current outstanding collections or charge off accounts, don’t rush in and pay them off prior to refinancing or purchasing a home It can actually hurt you in the short term. Here’s why:
Many collection accounts report once the account is created and then do not report again. So, a collection account from 3 years ago may only have reported when it was created and not since. So, it may not be hurting your credit score as badly as an account from say 3 months ago. But, if you payoff that 3 year old collection today and then get that collection company to report to the credit bureaus that it is paid in full, you are asking a 3 year old derogatory account to report current information. While this information may be positive in some aspects (the balance was paid in full) it is negative in others (a 3 year old collection is now reporting as a current collection). So, the net result may actually be a lower score.
From a long term perspective, it certainly makes sense to settle or pay all collections in full. However, don’t rush out and do this a few weeks before you apply for a new home loan. You may actually be doing more damage than good.
6) A Balancing Act
The most overlooked aspect of anyone’s credit is often their account balances. More specifically, their balances relative to their limits. A maxed out credit card, even though it may be paid perfectly every single month, will drag down your credit score. It is important to keep your credit card balances at or below 50% of their limits. You will see a significant improvement in your credit score if you can consistently keep the balances below half of their limits.
7) Oldy But Goody
The length of time you have had credit will also have an impact on your score. So, don’t be so quick to close that credit card you opened in college. It may actually be helping you qualify for better interest rates now. In addition, a new car loan, credit card or even a new home loan will reduce your credit score once it is opened. Over time, as the account establishes itself, it will only help to increase your score as you prove your ability to make the payments on time each month. However, the immediate impact upon your credit score is a reduction due to the creation of a new un-established account.
The Shallow Or The Deep End
It is important to have credit, but not too much credit. How much is enough and how much is too much? There is no exact answer to this question, but you have to use common sense. A good general rule of thumb is that you need to have a minimum of three active tradelines. That does not mean that you have to go run up balances on three credit cards, but you must show some activity on at least three accounts in the last 12 months. These accounts can be mortgages, car loans, credit cards or student loans. Often using a credit card to make a purchase and then paying the balance off in full will satisfy this requirement. You do not need to carry a balance, but you have to prove your ability to make timely payments. Using credit wisely means not over-using credit. While it may seem tempting to accept every 0% credit card offer you get in the mail, excessive open tradelines will lead to lower credit scores and turn downs from mortgage lenders. Keep your number of tradelines to a reasonable level and don’t let yourself be tempted into overloading yourself with debt just because it is at a good interest rate.
While no one can say how much each of these items will raise or lower your score, it is important to know that each one will have an effect. So, go employ your newfound knowledge and watch your credit score soar.
Mathew
