When I was in my early 20s, I was not what you’d call an informed consumer. Not by a long shot. I remember thinking, when I felt far too busy to worry about paying a bill on time, “It won’t matter. It’s not like they’re not going to get their money.”
What I didn’t understand is that payment history, including late or skipped payments, makes up 35 percent of your FICO credit scores.
Why is this important? Your score determines the interest rates you pay on loans. A low score could easily cost you an extra $50,000 in mortgage payments. Credit scores also affect insurance premiums. Landlords look at them when deciding whether to rent you an apartment. Employers may check your FICO score when you apply for a job.
I’ve wised up since then to what a powerful role credit scores play as a gatekeeper to opportunity in our lives.
Polish your score
There are several types of credit scores, but we’re talking here about your FICO scores, the ones used most widely. FICO scores range from 300 (the basement) to 850 (stellar). You can do plenty to improve your scores.
1. Order your credit reports
Begin raising your credit scores by checking your credit history. Records on your use of credit are kept by three major credit bureaus — Equifax, TransUnion and Experian. The reports can differ a bit, so it’s a good idea to get all three, especially since each company is required by law to give you one free report annually.
Here’s the lowdown on how to access credit reports. In brief, go to AnnualCreditReport.com and click “Request your free credit reports” (a red button) at the bottom of the page. Here’s what you’ll need to give: name, address, birth date and Social Security number, driver’s license number and phone number.
2. Correct errors
Your credit score from each bureau is based on the information in your report, so comb them for mistakes. Pay special attention to any incorrectly reported late payments. Also, check that the balance owed on each open account is correct.
Personal finance expert Liz Weston says don’t worry about misspellings of your name, whether a closed account is listed as open, the use of old or wrong addresses, or an old employer who’s listed as current. Focus on these important errors instead, Weston says:
There are two ways to dispute and correct mistakes: through the merchant or lender who made the error or through the credit reporting agency whose report contains the error. The Federal Trade Commission explains in detail how to dispute errors and offers this sample letter.
3. Negotiate to erase negatives
Also go after the negatives on your reports that reflect for-real problems, not errors.
You can’t dispute these, but you can ask creditors to erase a charge-off (an uncollected debt) or an account that went to collection. Before paying off the balances on these accounts, try negotiating. Write a letter to the creditor offering to pay the balance in full if they’ll call the account “paid as agreed” on your report, or remove it entirely. Tip: Get the agreement in writing before you pay off the balance.
Here’s a sample letter to use when asking creditors to make a “pay to delete” agreement with you and another for requesting a “good-will adjustment,” where you ask a creditor to remove the record of one or two late payments.
Most negatives, if accurate, can’t be erased. The further they recede in time, though, the less impact they’ll have on your scores. Eventually, they’ll drop off your record. But bankruptcy, foreclosure and delinquent accounts stay on your credit history for seven to 10 years.
4. Know the score
To know how much you’ve raised your FICO score, you’ll need to know what the score is now. The free credit reports you’ve ordered won’t include it. To get your FICO scores, you’ll usually need to pay — up to $19.95. Even then, the score you get won’t necessarily be the one lenders see.
Money Talks News founder Stacy Johnson says that’s outrageous. But so far, efforts to make FICO scores more widely available at no cost haven’t succeeded.
If you do buy your FICO score, don’t pay for additional services, like credit monitoring. You can do that yourself by regularly checking your credit reports.
5. Pay off debt
The more unused available credit you have, the shinier your FICO score is. About 30 percent of your score is determined by the percentage of your credit limits you are using. (All components of a FICO score are listed in this article.)
This is your credit utilization ratio. Example: If your Visa card has a credit limit of $2,000 and your balance is $1,500, you’re using 75 percent of your available credit – way too much. Use no more than 30 percent and preferably less of your available credit.
For a quick boost to your scores, pay off a card or two with low balances. Then work on blitzing the rest of your debts.
6. Raise your credit limits
Pump up your credit utilization ratio by asking your creditors to raise your limit on their accounts.
This strategy isn’t for everyone: Don’t raise your credit limits if the increased credit will tempt you to charge more.
7. Get a credit card
If you don’t already have a credit card, get one or two and then manage them responsibly — paying bills on time and not letting balances accumulate.
If you don’t qualify for a standard credit card, you can build credit with a secured card. Be sure to find a secured card that reports your payment record to all three credit bureaus.
8. Don’t cancel cards
You don’t want to cancel any credit cards because that would cause your available credit to decline. In order to keep cards active and not closed by the issuer for inactivity, put a recurring charge on them, like your Netflix subscription, and then pay them off in full each month so balances do not accumulate.
9. Add variety
You may be able to raise your scores a small amount by adding a different type of credit to your mix. For instance, buy an appliance or piece of furniture on installment, being careful to avoid even one late payment.
“Applying for and getting an installment loan can help your scores if you don’t have any installment accounts or you’re trying to recover from a credit disaster such as bankruptcy,” Weston wrote.
Another possibility is a small personal loan. A credit union is a good place to borrow as they typically offer lower interest rates.
10. Never be late again
If late or skipped payments have lowered your FICO scores, one of the most powerful things you can do to cure your scores is to make every payment on time. Your payment history is the single biggest piece of your FICO scores.
The no-fail cure to late payments is to automate them, as long as you keep sufficient funds in your bank account. (See: “8 Shortcuts to Getting Richer.”)
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