Checking your credit
In today's society, we are increasingly judged and rated on our credit scores. With the current economic climate, it is wise to be proactive and insure that your credit rating is the best it can be. Additionally, up to 79% of credit reports have errors on them, making it extremely important that consumers monitor and protect this important part of their financial picture.
Obtaining a copy of your credit report is easier today than it ever has been. The Fair Credit Reporting Act (FCRA) allows everyone in the United States to get one free credit report per year from each of the three major credit bureaus, Experian, Equifax and TransUnion, for a total of three reports per year.
Note that the credit bureaus offer many additional products and services enroute to the free reports. These are not necessary to get your free report. Credit scores are offered for sale also. When deciding to purchase a credit score with your report, keep in mind that the majority of lending institutions use FICO scores, based on the formulas developed by the Fair Isaac Corporation. Consumers unwittingly purchase other scores, including those developed by the credit bureaus, and are often surprised when their lender has a much different, and often lower score, to base their lending decision on.
There are five basic components to the FICO scores. Along with an explanation of what those components are and how much they factor into the FICO score, you will find effective information on how to utilize that part of the score to grow your credit rating.
1) Payment history 35%: includes late payments, public records, past due amounts.
Do pay all bills on time, every time. You will save money on late fees and help your credit scores. It is never too late to reestablish good credit habits.
Do check that any public records such as tax liens and judgments that are yours and have been paid reflect a paid status. Judgments are listed as satisfied when paid and tax liens are listed as released.
Dont close accounts that have accurate late payments on your credit report. This does not make them go away and can actually hurt other parts of your score.
2) Amounts owed 30%: balances on accounts, number of accounts with balances, and the utilization ratio : the balance-to-credit-limit amount.
DO keep revolving account balances under 50% of the account credit limit; balances under 25% are optimal. Accounts with balances at the limit generally have a detrimental impact on scores. Revolving accounts include credit cards, retail store accounts, fuel/gasoline accounts and some lines of credit.
DO keep accounts with zero balances active as credit building tools by using them once every six months for a small purchase of something you were going to buy anyway. Then pay the entire amount the following month as soon as the bill arrives.
Dont close accounts or request that your credit limits be reduced. Your available credit will be less, increasing your utilization ratio.
3) Length of credit history 15% : how long accounts have been open.
Do keep older accounts open even if you have other accounts you use more often. Using them as a credit building tool twice a year helps to show responsible use of credit over time, which is a plus to the scoring formula.
Do check with the lender to be sure that they report to all three credit bureaus. Having an auto loan with perfect payment history for five years at a company that does not report customer information to the credit bureaus usually does nothing to help your scores.
Dont co-sign for or add someone to your accounts without careful consideration. Any extreme use of credit cards and lack of subsequent payments will be your responsibility and will be reflected on YOUR credit reports.
4) Types of credit used 10% : number of various types of accounts.
Do strive for a good mix of types of credit. Revolving accounts and installment loans, such as mortgages, student loans and automobile loans, in good standing factor into this part of the score.
Do build up to 3-4 open, revolving accounts over time such as two major credit cards, one retail store account and a fuel card. Use these as credit building tools ONLY, not to accumulate and carry debt.
Dont make the mistake of thinking that having no credit accounts will help your score. The scoring formula needs something to rate.
5) New credit 10%: recently opened accounts and credit inquiries.
Do limit the number of credit applications you authorize and submit. Each time you apply, the lender checks your credit, which results in a Hard Inquiry. Hard Inquiries can count up to five points each against your score and will stay on the credit report for two years.
Do all of your auto and mortgage rate shopping within a two-week period. The FICO scoring formula will count all auto and all mortgage inquiries within a fourteen-day period as ONE for scoring purposes, even though they all appear individually on the credit report.
Dont expect a new account to have an immediate affect on your credit scores. It typically takes six months and one day for the new account to be factored into the scoring formula.
It is important to note that negative information such as late payments can stay on the credit report for up to seven years."> Older derogatory accounts have less impact on credit scores than recent ones, especially those within the past two years. Bankruptcies can be reported for up to ten years from the date filed.
What about errors on my credit report
As previously stated, most credit reports do have errors on them. All three credit bureaus now have on-line disputing as an option to correcting errors. If you have supporting documentation, such as receipts or copies of your identification, you may want to mail them into the bureaus to assure they are considered in the dispute investigation.
Mark your calendar when you send in a dispute because the credit bureaus have
thirty days per the FCRA to respond (forty-five days for free, annual reports). If they do not reply within that time period, the disputed items should be removed.
Using credit accounts wisely, actively monitoring credit reports and learning what you can do to positively impact your credit scores is essential to a successful financial fitness plan.
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