Understanding How Credit Works

Many people often talk about wanting to increase their credit scores. Some will pay off their credit cards in full every month; others will choose not to use their credit at all. Before we can go about trying to increase our credit rating, we must first understand how Debt is calculated.

5 Main Criteria For Calculating Debt

How to Improve Your Credit

TransUnion and Equifax’s Credit Score Facts

  • Credit scores range between 300 and 900

  • Higher scores are considered better credit risk by the lenders

  • Over 75% of the population have credit score above 700 (Only 56% above 750)

  • Higher scores will usually equate better terms and products offered

Top 5 ways to improve your Credit Score:

Looking for ways to improve your credit score? I’ve compiled a list of the top 5 ways that you can improve your credit score.

1. Pay your bills on time.

That’s a pretty simple one. Late or outstanding payments and collections can have a negative impact on your credit score. The longer you pay your bills on time, the better your score.

Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which could affect your score.

If you do have collections, be aware that even if you pay it off, it will stay on your record for seven years. Do yourself a long term favor and don’t let a bill get to the collection stage if you can help it.

2. Keep revolving credit balances low.

If you use credit cards or other types of revolving credit, either pay it off at the end of the month or try to keep the balances as low as possible. High balances will negatively impact your credit score.  If you have balances above 50% of your credit limit, you could see your credit score start to drop

Do not close existing credit card accounts, even if you don’t want to deal with the company any more… Believe it or not, the credit history is a good thing to have!

If you cannot lower your balance, see if your credit provider will increase your available lines of credit. This can, in turn, reduce the overall debt ratio, but only do this if your credit card company can do that without a hard credit inquiry

3. Limit your credit.

If you have a short credit history, do not open a number of new accounts in a short period of time.  Opening a number of new accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of additional credit information.  Do not open a number of new credit lines that you don’t need to increase your available credit.  This can actually lower your score.

Opening up a number of new accounts in rapid succession also makes you look risky to lenders.

4. Be focused when you go for credit.

Do your credit shopping for a given loan within a focused period of time. The formulas that are used to calculate your credit score can actually distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.  Using a broker can also help to reduce the amount of inquiry on your credit file.

5. Manage your credit responsibly.

Open new credit only as required. When that junk mail comes in saying you’re pre-approved for a new credit card, throw it away. Again opening this type of credit will impact your credit score.

Assuming you make your payments in a timely fashion, having credit cards and installment loans will raise your credit score. Someone who has no credit is seen as a greater risk than a person who has credit and manages that credit responsibly.  Closing a credit account does not make it go away and will still show up on your credit report, and may be considered by the score.

Something wrong on your credit report?

Check your report at least once a year.  You can request for your free report from Equifax (click for link) or TransUnion (click for link).  Don’t waste your money on the paid service as that report will give you the wrong expectation.  Review your free report and make sure everything is accurate.

Do you see errors in your report?  Request the credit bureau delete any outstanding debt that is incorrectly charged to you or things that should have been removed that you have already paid.  They have an obligation to reconcile this within 30 days.   If you see items on your report that are less than two years old and you have the money to pay it off now, mark the back of your payment check with the following notation: “Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record.”  If necessary, you can use this cancelled check as proof of the transaction in the event the outstanding debt is not removed promptly and interferes with the closing of your loan.

Are you thinking about hiring a company to repair your credit?

Beware of companies that promise to help you re-establish your credit for a fee. Their ability to change the information that appears in your credit file is no different than anyone else’s. Only your creditors are able to alter this information; therefore you do not need to pay a third party to obtain, discuss, review or make changes to your credit report. You have the right to access your information and make changes to your file if there is an inaccuracy or if you want to include a comment.

If you are thinking of hiring someone to repair your credit, remember this:

  • A credit bureau will not remove accurate negative information from your credit report before the legal time period has expired; therefore, do not believe anyone who claims they can get negative information removed from your credit report faster than is legally required.

  • There are no “loopholes” or laws that credit repair companies can use to get correct information off your credit report.

  • No credit repair company can do anything you can’t do for yourself. It is impossible for a third party to make changes in your file if the facts have been correctly reported. There are individuals and companies that claim they can fix a bad credit file. This is not the case. If a file includes accurate, yet negative information about your credit history, this information cannot be changed. Information will only be changed when your file contains an inaccuracy.

Summary:

Raising and maintaining a high credit score is pretty simple.

  • Get credit as required and don’t open credit for the sake of having credit.

  • If you have credit, keep your balances as low as possible.

  • If you do have a balance, make your payment on time.

  • If you do find yourself behind the eight ball, make it your mission to pick away at the debt to the best of your ability.

  • If you are having problems, talk to your creditor or see a legitimate credit counselor.

If you have any question relating to this topic or financing, feel free to contact me.

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