 Your
credit score can make or break your chances of getting that home loan
you've been wanting ever because you found that perfect home. They're
just numbers but they are in fact the very things that convince your
lenders you are a good risk.
So quick-fix your credit score? Sure! Why not?
Unfortunately, a lot of the so-called quick and easy credit repair
claims that often fill our email inboxes are no more than lip service.
Worse still, they claim to do something they cannot do, preying on
people's desire to find a quick fix for a major problem while at the
same time milking these people for all they're worth.
That can't be good.
And the truth is there is no such thing as a
quick fix to improve your credit score. At least, not legally, there
isn't. But there are, nevertheless, a number of techniques that you can
do to move your credit score along in the right direction.
Actually, the simple task of understanding how
the credit rating system works will put you in a better position than
you ever were before to improve your credit score.
Step 1: Understand Your Credit Rating
What is a credit rating? And how is it different from your credit score?
Most people believe that there is no variation
between a credit score and a credit rating. However, while both terms
are closely related, your credit score only makes up part of the
broader concept of credit ratings.
The credit rating system is not unlike the
grading systems used in educational institutions. There are particular
factors involved - accounts, payment habits, credit history, balances,
loans, mortgages, etc. - each of which are assigned their own "weight"
or score so that when you factor them all in using a specific formula,
you get the total weight, which is your credit score.
Currently, there are two popular formulas used in
the credit rating system - FICO (Fair Isaac & Co.) and
VantageScore. The three major credit reporting agencies, Equifax,
Experian, and TransUnion, are all using these two systems to calculate
your credit scores.
Your FICO Score
The FICO scoring system first came out in the
1950s when Fair Isaac & Co. began its pioneering work on credit
scoring. Since then, it has become a widely accepted method of
determining the likelihood of credit users paying their bills.
Fair Isaac & Co. and the credit bureaus that
use the FICO scoring system do not reveal to the public how the scores
are calculated, with the Federal Trade Commission ruling it as an
acceptable practice, but the factors involved more or less include the
following:
- Late payments
- How long the credit has been established
- Credit used
- Credit available
- How long credit user has been in his/her present residence
- Employment history
- Negative credit information, like bankruptcies, charge-offs, collections, etc.
Because there are three credit reporting agencies
that use the FICO scoring systems, there are in fact three FICO scores
available. Lenders will use either one of these or calculate the middle
score.
Your VantageScore
As the new consumer credit risk scoring system
available, VantageScore utilizes information from the three national
credit reporting agencies in order to come up with more predictive
scores on consumers. Furthermore, VantageScore is able to score even
those consumers with limited credit histories.
The credit reporting agencies say that
VantageScore is more "intuitive" since it breaks down like a report
card. Where the classic FICO score ranges from 300 to 850, VantageScore
runs from 501 to 990:
- 901-990 = "A" credit
- 801-900 = "B" credit
- 701-800 = "C" credit
- 601-700 = "D" credit
- 501-600 = "F" credit
However, this new rap about VantageScore being a
better scoring system than FICO shouldn't be taken too seriously. The
two systems have never been tested head-to-head against each other so
drawing conclusions now would be a bit too early.
At any rate, knowing the basics about the credit
rating system will give you some idea on how to improve your credit
score and how to avoid the pitfalls that could drag your credit score
down.
Step 2: Get a Hold of Your Current Credit Reports
Your credit report is not the same as your credit
score. For one thing, credit reports do not contain your credit score.
However, they do provide a very good avenue to check for errors so that
if you find that your credit score is low even though you have been
making your payments on time, you can use your credit report as
reference and dispute any errors you might find.
The three credit reporting agencies will provide
copies of credit reports if requested, charging a small fee for each
copy. The Federal Trade Commission also provides annual credit reports
to consumers and the good news is that the copies are free of charge.
You can get your own copy of your credit report
from the FTC website at AnnualCreditReport.com . If you're worried about
consistency with the credit reports you can get from the three credit
reporting agencies, don't. The credit reports you can get from the
website are all copies of your existing credit reports from these three
agencies.
Note that these free credit reports are being
phased in over time. So they are only available to those who live in
the west coast states of the United States (US). There is, however, a
time table on when you can get these free credit reports if you are
living in other areas of the US.
Another way for you to get free credit reports is
through any of the three credit reporting agencies. Though, you must
have been denied credit in the past 60 days, are unemployed, on
welfare, or believe your credit report contains inaccurate information
due to fraud in order to get the copies for free. Or else, the credit
reporting agencies will charge you a small fee for a copy.
Here are the three credit reporting agencies where you can get your credit report, as well as their contact numbers:
- TransUnion - 800-916-8800
- Equifax - 800-685-1111
- Experian - 800-682-7654
Once you get a copy of your credit report, check
it for errors. However, don't expect that your credit reports from each
of the agencies will contain the same information.
The thing is that they will probably contain
inconsistent information as these agencies get their information from
different lenders while the lenders, in turn, report to different
agencies. Moreover, mistakes may be made, and more often than not, any
errors in your credit report are a result of these mistakes.
Correcting errors in your credit report could
help to improve your credit score. However, if you want results, do it
through a mortgage company or a bank. First, you require proof that the
item is erroneous and it must come from the creditor himself. Examples
would be a letter stating that the account is not your account, that
the account was paid satisfactorily, a release of lien, a satisfaction
of judgment, a bankruptcy discharge, a letter for deletion of
collection account, and other related evidence.
It's going to be a lot of paperwork but it's
going to be well worth it. The end result would be an improved credit
score and a lower interest rate.
After checking for an errors and correcting them, it is now time for you to take positive steps to improve your credit score.
Step 3: Pay Your Bills on Time
Paying your bills on time in fact accounts for 35
% of your credit score and the single biggest mistake you can make to
drag your credit score down is to pay your bills late. A couple of past
due payments on your credit history are like a red "F" mark on your
report card and they will negatively affect your credit score in a
major way, turning lenders away from you.
Remember that when it comes to credit scores,
recent history is more significant than past history. So even if you
have been faithfully paying your bills on time but then recently missed
out on a couple, this could have a terrible effect on your score. Your
clean records may fall dramatically due to a few missed payments.
Furthermore, some lending companies use the
missed payments on your credit report as an excuse to raise your credit
card interest rate. This gives you all the more reason to pay close
attention to your payment habits and always making sure that you make
your payments on time.
If, however, you have been remiss in your
payments before but desperately need to get a loan now, the quickest
solution to improve your credit score is to piggyback someone else's
credit. No, this does not involve scamming someone, but it does involve
a lot of trust.
Essentially, what you're going to do is to have
someone with whom you have a very trusting relationship with to add you
to their credit account. Once done, their payment history is going to
be reported on your credit report, too. If they have perfect credit,
you also have a perfect account.
Step 4: Reduce Your Debt Load
Paying your bills on time can only do so much. In
addition to making sure that you make your payments on time, you also
want to reduce your debt load all together as doing so will greatly
improve your credit score. Actually, the less debt you have the better
your credit score will be.
This is a significant reminder for those who use
their credit cards often. Even if you religiously pay your credit card
bills each month and on time, your credit score may still get hurt.
This is especially true if the loan company just happens to access your
credit score at a time prior to your making payments.
Credit scores do not often take note of your
credit card payment habits. Rather, they highlight more on who has
balance in their accounts, so that if you are the sort who likes to use
credit cards for the rewards they offer and pays timely, it may still
look like you have a lot of debt on record.
More debt load = bad for business.
A simple tip would be to refrain from using your
credit cards for a few months before applying for a loan. That way, you
can address the problem of having added debts to your supposedly
spot-free record.
However, note that the word used is reduce, not
pay off. Credit scores are all about managing your debts well. If you
pay off all your debts, you're not managing them at all. In fact, it's
going to look like you're trying to pay them off quickly in order to avoid managing them. This could hurt your credit score.
Instead, what you should do is to pay off enough
of your outstanding credits to make your credit score look good. Then,
manage the rest.
Step 5: Don't Close Old Accounts
For the past few years, the one constant advice,
financial experts offer to consumers is to close out any old credit
card accounts they have. The belief was that these older accounts,
though no longer used, can negatively affect your credit score.
However, this is no longer the case today. As a
matter of fact, closing your older accounts may in fact hurt your
credit score, rather than boost it. The reason behind this is that when
you close your older accounts, you decrease the amount of credits you
have available.
This, in turn, means that the outstanding
balances you have in your other credit accounts will factor in more in
calculating your credit scores, thus, resulting in a lower score.
Furthermore, closing your older accounts can
shorten your credit history. And a short credit history is a big
turn-off for your credit standing, lowering your score even further.
And finally, just as you are discouraged from
closing your older accounts, avoid opening new ones as well,
particularly multiple new credit accounts. Each time you open an
account, your lender will request to take a look at your credit report
and this could adversely affect your credit score. So to prevent this
from happening, try not to open new accounts no matter how tempting the
offer of 10% per $100 purchase is.
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