Your credit score is the equivalent of your modern day passport to financial opportunities.
With good credit you can get better rates on mortgages, car loans, and even some insurance policies. Good credit can open the door to certain jobs, apartments, and more.
And if your credit is bad your borrowing costs tend to go up and certain opportunities can disappear.
That is why keeping your credit healthy is extremely important to your financial life.
Your credit report paints a picture of your credit history past and present. It tells of past borrowing and current spending and lenders use it to predict your financial future.
And because lenders rely on it so heavily when decided whether or not to grant you a mortgage and what your rate will be, it is critical that you make sure the information contained in your report is accurate.
Due to it's potential impact, a federal law was passed allowing Americans to obtain a free copy of their report from each of the 3 major credit bureaus. Under the law you can get one copy from each bureau every 12 months.
Recently, with the onset of the global pandemic, the rules were amended to allow individuals to access a copy of their report for free more frequently. As of February 2022, you can get one free copy every week (7 days).
Here is a video with the details on how to get your free reports:
The information in your credit report is used to create your individual credit score. This score is typically the first thing lenders will look at when deciding whether and they higher the score the better.
Credit Score Basics
“The goal of a credit score is to provide a quantifiable prediction of the likelihood of default in the next 24 months,” according to Thomas Wade with the American Action Forum.
In other words, it determines a borrower’s creditworthiness.
The scale of credit scores ranges from 300, the worst possible, to 850, “… considered the unicorn of the financial world: a perfect credit score,” according to Stefan Lembo Stolba at experian.com.
Only 1.2% of credit scores from FICO® have reached that magic number, so don’t feel bad if you aren’t among them.
Scores that fall below 850, are grouped as follows:
FICO, short for Fair Isaac Corporation is the data analyst that determines these scores.
They do so by analyzing our credit reports from the “big three” credit reporting agencies, Experian, Equifax and TransUnion.
The most important thing to understand about your FICO score is that it’s fluid, moving up and down according to how you use credit.
Rule Number One To Raise Your Credit Score
The easiest way to increase your FICO score is by avoiding late payments. Every month, pay your bills on time.
If you think this sounds too simple to be true, consider this:
“… someone with an average credit rating of 707 can raise their score by as much as 20 points by paying all their bills on time for one month,”
according to Jessica Seid, CNN/Money staff writer.
The Credit Card Trap
There are tricks to using credit cards and loans when it comes to trying to repair your credit. These tricks are evident when we consider how the reporting agencies look at credit card use.
Age of credit–Older credit, whether cards or loans, makes the potential borrower appear less risky. New credit can ding your FICO score by as much as 10 points.
Balances– Maxed out credit cards can cause up to a 70 point reduction on your credit score. The agencies want to see available credit.
Lack of accounts–If you have no credit card or loans, credit agencies will wonder why.
If you’ve been caught in the credit trap, start paying down your high balances first. Don’t close any credit cards.
No Credit Score?
Because they have no history of credit use, the credit reporting agencies consider these people credit risks.
If you are among this group, you’ll want to do the opposite of those with low scores. Get and use a credit card, ensuring that you pay the entire balance, on time, every month.
Tip: Obtain a secured credit card from a company that reports to the credit reporting agencies.
How To Fix Your Credit Score, Step-By-Step
Obtain your reports from all three of the major credit reporting agencies. Americans are entitled to one free credit report from each, annually, from annualcreditreport.com. For additional information on the free credit reports, visit the Federal Trade Commission’s website.
Comb through the reports looking for errors. Dispute any that you find. The FTC website shows you how.
Vow to pay your bills when due.
Reduce your credit card balances.
Since older, seasoned credit is more attractive to credit agencies, don’t let old cards go stale. Use them, but remember to pay off the balance when due.
Request an increase to your credit limits. Avoid the temptation to max out the additional credit, though.
Professional Credit Repair
There may come a time when you need professional credit repair.
If you've had a bankruptcy or foreclosure or you have accumulated a lot of debt and can no longer make the payments, you may need a professional credit repair specialist to step in and help.
At the 812 Living Group, we work with local credit repair specialists who may be able to help. Recently we spoke with Julia King, owner of King Financial Repair, about the credit repair process and how her firm could help. Here is what Julia had to say:
You can reach Julia and her team at https://www.kingfinancialrepair.com .
Healthy Credit Is A Journey
Building and maintaining good credit is a journey that never ends. Like a garden, it takes attention and tending to in order to keep it healthy.
The journey requires a process of consistent monitoring, regular payments, and occasional repair as needed.
But the benefits can be better and more financial opportunities for those who put in the effort.
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