How To Improve and Protect Your Credit

September 08, 2016

One common question I get on our financial helpline is how to increase your credit score. After all, your credit report can impact the interest rates you pay on loans (or whether you can even get a loan at all), your insurance premiums, and even your ability to get a new job. Whether you’re just starting to build a credit history or are rebuilding one, here are some things you can do:

Make sure there are no errors on your credit report. It’s been estimated that about 70% of credit reports have errors on them. It’s bad enough to be penalized for your mistakes. You certainly don’t want to be penalized for someone else’s.

You can get a free copy of each your three credit reports (Experian, Equifax, and Transunion) at AnnualCreditReport.com. (Don’t be fooled by copycat sites that require you to supply a credit card number for the “free” credit report.) Then report any errors you may find that may be hurting your score. Some people even report any negative information since it’ll be removed if the creditor doesn’t respond in time.

Reduce your debt balances. Try not to use more than 30% of the credit available to you on your credit cards. If you’re already above that, try to pay it down.

There is one exception though. If you have an old debt, you might not want to pay it off and just let it fall off your credit report after 7 years. However, just because it’s not on your credit report, doesn’t mean you don’t owe. Unless you’re also past your state’s statute of limitations, the creditor can sue. In addition, be aware that if you make any partial payments or even acknowledge the debt, it can restart that clock for your state.

After you’ve paid off debt, you may not want to close the credit cards since that will reduce your credit available and hence the percentage of your total credit you’re using if you have any balances (even if you pay them off each month). Instead, just shred the card if you’re afraid of using it and keep the account open. If you want to keep using it but don’t like the rewards, you can also convert it to another card with the same bank.

Build a positive credit history. This is the most important step but the one that takes the longest. The main thing is to have credit and make all your payments on time. If you can’t qualify for a regular credit card, see if your bank will let you open a secured credit card that’s backed by a bank deposit. For any credit you do have, set up automatic payments to make sure you don’t miss any payments.

Set up credit monitoring. No matter how many precautions you take, things happen. For example, I once missed a medical bill because they had my address down wrong in their system. Fortunately, my credit monitoring was able to catch it, and I was able to pay it before it hurt my credit. A lot of companies charge for this, but you can get free credit monitoring from sites like Credit Karma and Credit Sesame.

Consider a security freeze. A security freeze can prevent someone from opening credit in your name. Each state has different rules, but you generally just have to pay a one-time nominal fee for each credit bureau. Just know that you’ll need to un-freeze your credit if you want to apply for new credit and then pay to re-freeze it again.

Want more info on this or other financial topics? If you have a question you’d like answered on this blog, feel free to email me  directly. You can also receive my future posts by following me on Twitter and/or subscribing to my posts on the blog home page.

What Really Matters to Your Credit Score

June 15, 2016

Do you know what elements make up your credit score? First, it’s important to know the difference between your credit score and your credit report, which are often confused. Your credit score is based on the items found on your credit report, kind of like how your grades are based on how you did on your homework and class assignments.

In order to get a better grade, you need to improve your homework and assignments. So before you freak out because your score is lower than you think it should be, you need to know how it’s calculated. Here are five things that you might think matter – but don’t – and five that really do.

What Doesn’t Matter

  • Employment history. Even though the amount of credit card offers I receive skyrocketed when I re-entered the workforce after being self-employed back in the day, credit agencies do not track your employment, nor does it affect your credit score. Whether or not you have a job may affect your ability to obtain credit (such as a loan or credit card), but that information does not go into your credit history.
  • Interest rates on debt. The lower your rates, the quicker you’ll pay off debt, which matters. But having higher rates does not affect your score.
  • Savings account balance. Your credit score is based solely on your credit history. Your bank account balance is not a part of your credit history. Rich people can have bad credit too.
  • Your age. Your date of birth might be on your credit report, but it does not play into the calculation of your credit score.
  • Where you live. Sorry, but that swank ZIP code won’t do diddley for your credit score if you’re not paying your bills on time!

What Does Matter

  • Paying on time. Whenever anyone asks me how to increase their credit score, my automatic response is, “Pay all your bills on time. Every time.” One late payment can wreak havoc on your score. You’d be surprised how many wealthy people struggle with this one!
  • Your credit utilization. The balance of your accounts relative to your credit limits definitely makes a difference on your credit report. The closer you are to maxing out, the worse the effect.
  • How long you’ve had credit. It’s called a credit history for a reason. The whole purpose is to help a creditor decide if they should lend you money. The further back you can demonstrate that you regularly pay your debts back, the better your score will be. This is where the advice about keeping a zero balance card open comes into play – just to show how long you’ve had it.
  • New accounts and credit checks. Opening a slew of new accounts (or attempting to) in a short period of time is a red flag to a lender. It can indicate that you’re planning a spending spree or that you are expecting to lose your job. If you’re planning to apply for a mortgage or other loan where your interest rate is determined by your credit score, try to avoid applying for any new credit cards at the same time.
  • The number and type of accounts. There are such things as “good debts” and “bad debts.” Having a mortgage, student loan or car loan looks better (as long as you don’t have late payments on your record), because it implies that you’re responsible enough to maintain a home, go to school and take care of a car. Plus the things that credit bought tend to last longer than the loan, making it good debt. Credit card debt isn’t as flattering – especially a bunch of store cards that are maxed out. Hello, shopaholic!

Finally, make sure you’re checking your credit report annually and cleaning up any errors. (The ONLY official place to get your federally mandated free reports is at www.annualcreditreport.com.) After all, one more thing that can matter to your credit but shouldn’t is someone else’s mistakes.

 

Why Everyone Needs to Check Their Credit Report

April 05, 2016

I try to practice what I preach but I do not always succeed. I was recently talking to a group of people about the importance of checking their credit reports at least once a year to make sure that it is accurate.  After I was done talking to them, I started thinking about the last time I reviewed my credit report.

When I could not come up with a date, I realized that I needed to start checking the credit report for me and my husband. I went to Annual Credit Report.com website to get our credit reports from Transunion, Equifax and Experian for free. I thought it would be a short review and then I could pat myself on the back for doing what I encourage everyone to do. Unfortunately, that was not the case.

If you have read any of my blog posts, you probably think my family is on a first name basis with the emergency room. Between my husband’s health issues and my recent car accident, I can probably get to the emergency room blindfolded. An ambulance bill we were unaware of popped up on my husband’s credit report from over a year ago.

I called and it turned out it was an old unpaid bill that we never received. It was sent to the wrong address and it was never sent to our healthcare provider. We contacted my husband’s health insurance company, sent them the emails verifying we were unaware of the bill and surprisingly, they paid the bill.

After a few months, we noticed that the delinquency was still on his record. We first contacted the creditor to ask for the information to be removed. After all, they got the address wrong and the bill was paid by the healthcare provider. They basically told us that there was nothing they could do.

We then disputed the bill online, providing supporting documentation (it took about 5 minutes) with all three credit reporting agencies. Credit reporting agencies must investigate disputed items, typically within 30 days. After about 30 days, I received an email stating that the information will be removed from our report. After another 30 days, the information dropped from our credit report.

Do not assume just because you pay your bills on time that your credit report is fine. Once a year, use a  checklist like the one on the Nolo website as a guide to reviewing your credit report. Review each section of your credit report for the following:

Personal information section: Make sure your name, address, social security number, birth date and phone numbers are correct, especially if you have a name shared by other people (John Smith, etc).

Public records section: Check for incorrect information or information that should no longer be reported  such as bankruptcies over 10 years old, tax liens you paid more than seven years ago, and criminal arrest record more than 7 years old.

Credit account section: Check to make sure that the credit history reported is actually your credit history and not mixed with someone with a similar name. Ensure that all of the accounts listed status is current. For instance, an account that should be closed is still listed as opened. Also check for adverse information over 7 years old.

Inquiry section: Review this section to make sure that the credit inquiries were done with your permission.

If your find inaccurate information, first contact the creditor, if possible, to dispute the item. If that does not work, then dispute the items with each credit reporting agency.  The credit reporting agencies are required to investigate. Taking these steps will go a long way to preventing any unpleasant surprises on your credit report, especially during critical times like a house or auto purchase.

 

 

The Kids (Credit Scores) Are All Right

August 06, 2015

Which generation has the lowest average credit score? According to this article, it’s the Millennials, who have a 625 VantageScore vs 650 for Generation X and 709 for Baby Boomers. This is unfortunate since Millennials are the most likely to look for a new job or buy a home, which are two of the situations when having good credit can be most important. Continue reading “The Kids (Credit Scores) Are All Right”

What Really Matters To Your Credit

July 21, 2015

One of the most common questions I get is how do I improve my credit score. There is so much information on the Internet that people cannot make heads or tails of it. I was talking to my buddy, Kelley, a fellow CFP(R) professional and CPA, and she offered great insight as to what really matters vs. what does not matter to your credit score. Below are her thoughts: Continue reading “What Really Matters To Your Credit”

Will Changes to FICO Scoring Affect your Credit Score?

September 15, 2014

Are you thinking of applying for a loan in the future? If so, you might want to know that there are some upcoming changes in how FICO calculates credit scores. This is important to be aware of since FICO is one of the most widely used credit scoring methods. The new FICO® Score 9 will incorporate three major changes. Continue reading “Will Changes to FICO Scoring Affect your Credit Score?”