A solid credit score is essential as you navigate through your financial life. From obtaining mortgages, auto loans and credit cards to background checks from a prospective employer or landlord, your FICO score can have far-reaching effects on your ability to achieve your goals.
While improving your credit rating is no quick or simple task, the strategies outlined below, along with some discipline and patience, may help add points to your score over the long term.
First, let’s examine what comprises a credit score and how it works. A FICO score is a number that most lenders use to assess your credit risk and is derived from each of the credit bureaus: TransUnion, Experian and Equifax.
Scores can range from 300 to 850 depending upon the credit bureau reporting the data. Remember, a higher number is better as it represents to lenders that you are a low credit risk.
The criteria that account for your score are as follows: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), new credit requested/inquiries (10 percent), and type of credit used (10 percent). Once you understand the variables that affect your score, you are ready to tackle the task of increasing it.
The first step in the process is to request your credit report and score — at least once a year. Although the credit bureaus are required to provide a free credit report each year, they do not have to give your official FICO score and often require that you sign up for a credit monitoring service to do so. As an alternative, you can purchase your scores for a small fee from www.myfico.com.
Once you obtain your credit report, consider checking for accuracy and dispute erroneous information since it can hurt your score. For example, if you have accounts that should be listed as “current” or “paid as agreed” that are incorrectly noted as “settled” or “paid charged-off,” contact the credit bureau immediately. Bottom line — make sure that your score is based on accurate data.
Next, work on establishing a positive credit history from this point forward. The good news is that derogatory items on your credit report from the past, including bankruptcy or short sales, will not be there forever, and your most recent payment history has a larger impact on your score than older data have.
Work on getting current with your bills and building a history of on-time payments because they will increase your score gradually over time.
Since making your payment on time is one of the most important contributing factors to your credit score, consider using payment reminders through institutions that can send a text message or e-mail notifying you of your approaching due date. This can help ensure that you do not miss a payment due to travel or simple forgetfulness.
If you are unfortunate enough to have a late payment on your credit report, consider contacting the lender to see if it can be removed. Remember, everything is negotiable, and if you have been a longtime customer, credit card companies may be willing to remove the late payment from your report as a courtesy.
Also consider requesting that your account be “re-aged.”
This process may help clean up your credit history since a re-aged account is no longer considered past due. The request must come in writing. It also must list the reasons for your past late payments and establish a new payment schedule.
Another significant factor when determining your credit score is your credit utilization ratio.
Do your best to keep your credit card debt to no more than 30 percent of the available balance — a ratio below 10 percent is even better. For example, if your credit limit on a card is $5,000, work toward keeping your outstanding balance below $500.
Eliminating debt completely should be your ultimate goal, and paying down debt over time will improve your utilization ratio and credit scores.
In addition, avoid unnecessary credit inquiries because they will reduce your credit score.
While it may be difficult, resist the temptation to open new credit cards at retailers offering promotional discounts. Each time an inquiry is made, your score may decline by a few points.
Improving your credit score is not something that will occur quickly. In fact, it can take years to see a meaningful improvement.
While a strong credit score is important, paying down debt in an effort to improve your financial foundation should be the first priority.
Kurt J. Rossi, M.B.A., is a certified financial planner practitioner. He can be reached for questions at (732) 280-7550 or kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.
