Your Credit and Tips to Improve It

By
Real Estate Agent with Carole Jacoby & Co. Real Estate CA DRE#00373261

Your credit score and history are your keys to low interest rates and the ability to buy a home.  If you're thinking of buying a home, your first step is to obtain your credit report and score to be sure that all of your credit information is reported accurately, that there is nothing on it that does not belong to you, and that your credit score is high enough that you do not present a risk to a lender.    

You may be wondering, "What is my credit score?"  The credit or FICO score is "a numerical expression based on statistical analysis of a person's credit files, to represent the creditworthiness of that person" (http://en.wikipedia.org/wiki/Credit_score).  In other words, the credit score is what credit card companies and lenders use to determine if it's a risk to extend credit to you or loan you money. 

All consumers are entitled to receive a free copy of their credit report each year.  Visit http://www.annualcreditreport.com to receive your free copy from each of the three credit bureaus: Equifax, Experian, and TransUnion.  To obtain your credit score from any of these agencies, you will need to pay extra, but you should obtain a credit score report from at least one of the bureaus.  You do not need to purchase any credit monitoring services to obtain their free credit report.  Knowing the credit score (and associated reasons for why it is what is) will help you know how to fix your overall credit and raise your score. 

The following site gives an overview of credit scores: http://www.creditscoring.com/ pages/bar.htm.  If you already have what is considered a good credit score, you may not want to make any drastic changes in the way you're handling your credit, as making any changes could cause your score to drop rather than raise it any higher.  For those whose scores fall below 680, following some of the next steps may help raise your score.

Begin by verifying your name, current address, and social security number on your credit report.  Then review all of the accounts listed on each of the reports to be sure that they are yours, that the balances are correct, and that the payment status is correct.  Be aware that each of the three credit reporting agencies may list different information.  Some creditors may report to only one or two of the agencies, while others may report to all three.  If there is any information on your credit report that is not yours, contact the creditor immediately to verify the information.  If you suspect identity theft, you will need to request a fraud affidavit and possibly notify police.  The information in this article does not extend to cases of identity theft.

Now that you have verified the information on your credit report and looked at your credit score, you will likely notice the reason codes for why your credit score is what it is.  There are several factors that affect your credit score: late payments, collections and charge-offs, length of credit history, and available credit are the most common.    

Late payments account for a large percentage of your credit score, so you want to be sure that your payments always arrive on time.  Late payments over 30 days will be reported to the credit bureaus and remain on your credit report for 7 years. Make it a priority to know the due dates on your credit cards and other installment loans and mail your payments at least 5-7 days before the due date.  Credit card companies do not have to post your payment the day they receive it, so be sure to allow for ample time in case they do not post immediately. 

Many banks offer free online bill payment.  Some of these systems are similar to mailing a check, so consumers still need to allow for mailing time.  However, you can set up automatic payments for your bills each month and never have to worry about being late again.  Many credit card companies and lenders have now added free bill pay services to their websites as well.  These systems generally allow consumers to pay their bill right up to the day that it's due.  These companies may also offer automatic payments from your bank account or a credit card.  Some companies will even allow you to make a change to your due date for your bills.  You will need to contact your creditor to inquire.  Note - they may charge a fee, so be sure to ask.  

Be sure, when reviewing your credit report, that all credit cards and loans that have been paid off show a zero balance.  If you've had accounts that have gone to collections or have been charged off, be sure to check that those are showing as paid.  Contact your creditor to update your report if you find anything reported incorrectly; incorrect balances could affect the portion of your score related to available credit (explained below).  You should always keep the statements that show you've paid an account in full in case you ever have to dispute it with the creditor or the credit bureaus. 

Length of credit history is very important; accounting for approximately 15% of your overall score.  Keeping credit cards open and active is important to maintaining that credit history, even if you don't use the card that often.  Use you credit card once or twice every few months and pay the balance immediately to maintain the credit card and retain a solid history.  If a credit card company is acquired by or merged with another company or if the card has been reported lost or stolen, your creditor may reset your opening date and you may not receive the history that is so critical.  Contact your credit card company and make sure they have the accurate date that you opened the original account.

The amount of debt that you carry on all your credit cards and loans accounts for a good portion of your credit score, so it's important to keep your debt low in relation to the amount of available credit that you have.  Keeping balances under 50% of the available credit is good, but keeping it under 30% is ideal.  Lenders look closely at the amount of debt you are carrying when you apply for a home loan.  To lower your credit balances, paying just the minimum amount will not get your credit paid off quickly and you will pay a lot more in interest than your original purchases initially cost.  To pay off your debt faster, try to double your minimum payment, if you can.  There are several different methods to pay off your debts explained here: http://moneycentral.msn.com/smartbuy/home.asp.

You want to be sure that your credit score is above 680 to take advantage of better interest rates when you're shopping for a home.  You will be happy when you have focused your attention on improving your credit score and your overall report.  Knowledge is certainly power, and knowing your credit score and understanding the report will give you the power to achieve home ownership.

This article is intended to provide general information only, not specific advice.  If a consumer requires more assistance, he or she should consult a financial professional.

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Rainer
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Dave Sullivan
Real Estate One - Birmingham, MI
Michigan Realtor with an investor viewpoint

Great information I did some testing on the MYFICO estimator and found the best level to have your revolving balances and it is not $0 check it out here http://www.thecreditguy.tv/how-to-pay-bills-in-a-way-to-maximize-your-credit-score/

Mar 13, 2012 09:33 PM #1
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Carole Jacoby

Residential and Relocation Specialist in Fresno
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