December 6th, 2016 5:06 AM by Jackie A. Graves, President
credit score below 760? That’s the score at which you are likely to get the
best interest rates on a mortgage. If you’re not interested in buying a home
but need to rent a new apartment, it will still be a challenge if your credit
score is below 600-650 (higher for more expensive units), regardless of your
income. In some cases, even your job may depend on maintaining good credit!
While only time and good credit habits will boost your credit score
dramatically, if you are close to your desired level, there are some things you
can do now to improve your credit score over a period of a few months.
errors on your credit reports
Make sure your credit report doesn’t contain any errors. The
Federal Trade Commission found that five percent of consumers had an
error on at least one of their three credit reports from major credit bureaus.
According to the Consumer Financial Protection Bureau, common
credit reporting errors included
things like mixing your accounts with someone with a similar or same name,
identity theft, closed accounts reported as still open, and negative items
remaining on your account after they should have been dropped. Here are steps
you can take now to correct errors:
free copies of your complete credit reports from the three major credit bureaus on the federally authorized site annualcreditreport.com.
Review them carefully, looking for items that aren’t yours, balances that have
been paid, items that have been reported multiple times, and other mistakes.
any mistakes that you find. While
this isn’t most people’s idea of a fun afternoon, it is something you can – and
often should – do yourself or with the help of a nonprofit
consumer credit counseling agency. The three major credit
bureaus accept dispute filings online (links to dispute sites here: Equifax, TransUnion, Experian).
If you are considering a for-profit credit repair firm, watch
out for scams. Make sure they explain your rights to you (including
your right to do it yourself), don’t ask for the entire fee up front, and don’t
promise you a huge jump in your score. Unless you have complex credit problems,
your money may be better spent paying down balances and building up an
emergency fund so you don’t have to borrow again.
Are you making your minimum payments on time? Your payment history
(where delinquent payments show up) contributes the most to your credit score.
Late payments generally stay on your credit report for seven years. Make
Make all your payments on time. For most people, the easiest way to do this
is to put all your bills on automatic payment. However, if you’re living
paycheck to paycheck, you may need to stagger your bills throughout the month
to avoid incurring overdraft fees.
any outstanding bills that haven’t been sent to collection. Are you a
month or two behind on a utility or credit card bill? If possible, pay those
A payment that is one to two months late doesn’t affect your
credit as much as one which is made three months late or later. Once your
accounts are current, they will begin contributing positive data to your credit
report going forward. The late payment will still show up on your report, but
the impact will lessen as time passes.
any outstanding bills sent to collections. This demonstrates that you paid what you owed
– better late than never. If the bill has been charged off, make sure you can
pay it in full before paying it. Otherwise, the clock starts ticking on the
collections process again and the item will stay on your account for another
your credit utilization
Credit utilization is how much of your available credit you are
utilizing and contributes significantly to your overall score. It’s calculated
by taking your total credit balances divided by your total borrowing power. Why
is it so important? Lenders want to see that you aren’t using so much of your
available borrowing power that it becomes a challenge to pay everything back.
Best practice is to keep your credit utilization below 30 percent. To improve
your credit utilization quickly:
close any cards or reduce your credit limit. This would reduce your total borrowing power,
thus increasing your credit utilization.
some of your cash reserves to pay down balances so that credit utilization is less than 30
percent. The risk? You may have an emergency during the next few months and
need to dip into credit again to pay for it. It’s probably worth a try, though.
a 401(k) plan loan to pay down balances to reduce utilization to less than 30
percent. A retirement plan loan is not reported to the credit bureaus. The
transactions can be processed quickly and you may be able to execute this
within a few weeks. As a bonus, you will replace high interest credit card debt
with a low interest loan from your own retirement assets.
The biggest disadvantages? Since retirement plan loans generally
have to be paid within 5 years and are deducted from your paycheck, it may
squeeze your cash flow, so make sure you can afford to pay it back without
reducing your retirement plan contributions. Plus, if you leave your employer
for any reason before the loan is repaid, the unpaid loan balance can become an
early retirement plan distribution, subject to income taxes and penalty.
close any accounts
Credit age (how long your accounts have been open) has a moderate
impact on your credit score. Lenders generally want to see that you have at
least three open and available sources of credit, where you are current on your
payments. The longer you’ve had your account open in good standing the better.
Keeping accounts open maintains your credit age and, as mentioned, helps with
even think about opening any new accounts
Shopping around for credit cards, mortgages or car loans can hurt
your score. Credit inquiries that matter are those that happened during
the past two years. During the period in which you are trying to raise your
credit score, don’t apply for any new sources of credit.
letters of explanation
Derogatory marks such as bankruptcy, tax liens, collections,
foreclosure, short sales and civil judgments can be very damaging to your
credit. They have a very high impact on your credit score. Most stay on your
report for seven years. However, a bankruptcy under Chapter 7 stays on your
credit report for ten years.
Time passed before the seven year period may reduce, but not
eliminate the impact. For very derogatory items, you could consider submitting
a very brief letter of explanation (but not an excuse) to explain how a
particular negative event occurred (for example, a foreclosure following a long
period of unemployment or late payments as a consequence of divorce). Credit
experts are split as to whether it’s better to submit an explanation or say
If you are within striking distance of a certain credit score
needed to accomplish your goals, taking some or all of the steps listed above
may help put you over the finish line. Want to read more on this topic? See
this post on what does and doesn’t matter to
your credit score. I wish you an excellent credit score!
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