A positive outcome of the 2008 financial crisis was it helped shine a light on the importance of understanding and staying on top of one’s credit profile. Along with that heightened visibility, however, has come a great deal of confusion and misunderstanding – particularly around the all-important credit score.
“The consequences of not maintaining a sound credit score can be very costly,” noted Anthony Sprauve, senior consumer credit specialist at FICO. “A low score can bar you from getting a new loan, doom you to higher interest rates and even cost you a new job or apartment.”
Five factors are used to determine credit scores: payment history (usually around 35 percent of the score), amount owed (30 percent), length of credit history (15 percent), newly opened credit accounts (10 percent) and types of credit used (10 percent).
Fortunately, if a credit score has taken a hit, individuals can initiate several actions that will begin improving it almost immediately. Just be aware that it can take many years to recover from events like bankruptcy or foreclosure.
First, individuals should find out where they currently stand by reviewing reports from each major credit bureau (Equifax, Experian and TransUnion). Look for negative actions creditors might have reported as well as errors and fraudulent activity, which can be challenged through the bureau’s dispute resolution process. People can order one free report per year from each bureau through the government-authorized site, www.AnnualCreditReport.com. Other agencies and websites charge a fee for such reports.
It’s a good idea to request a credit score as well. Lenders use it to supplement their own selection criteria when determining whether an individual is a worthy credit risk. Several types are available, including FICO® Score, VantageScore (a competing model jointly created by Equifax, Experian and TransUnion) and proprietary credit scores from each of the three bureaus, among others. Scores typically cost from $15 to $20 each.
Note: offers for free credit scores are usually tied to expensive credit-monitoring services looking for paying clients, and could result in contractual obligations or bothersome telemarketing calls at a minimum.
Always read agreement terms and contracts carefully.
The following are some few tips for improving one’s credit history:
• Always pay bills on time and catch up on missed payments.
• Set up automatic payments for recurring bills and automatic minimum credit card payments if you often miss deadlines.
• Sign up for text or email alerts when your bank account balance drops or payments are due.
• Never exceed credit card limits.
• Monitor the credit utilization ratio (available credit compared to what is being used). Try to keep the cumulative utilization ratio – and the ratios on individual cards or lines of credit – below 30 percent.
• Be wary of transferring balances to a new card for a lower rate. It can ding a credit score – although it won’t take long to recover. Make sure the transfer doesn’t increase your utilization ratio on the new card.
• Make sure charge card account limits reported to the credit bureaus are accurate.
• Don’t automatically close older, unused accounts; 15 percent of a score is based on credit history.
• Each time individuals open a new account it slightly impacts their score, so avoid doing so in the months before a major purchase.
• Pay off medical bills, as well as parking, traffic and even library fines. Once old, unpaid bills go into collection, they’ll appear on a credit report.
“Bottom line, don’t lose hope,” said Sprauve. “The negative impact of past credit problems will gradually fade as recent good payment behavior begins to show up on your credit reports.”