A growing number of Americans are checking their credit and know the way the scoring system works. Fifty-seven percent of people have received at least one credit score over the past 4 years, up from 49% four years ago, as outlined by a survey by the Consumer Federation of America and VantageScore Solutions.
Credit worthiness way too low? Here’s steps to increase it
The survey also indicates that people who get their score know much more about how the system works than those who don’t. For example, large majorities of folks correctly identify three key factors used to calculate their scores – missed payments (86%), high credit-card balances (81%) and personal bankruptcy (79%).
Having said that, there are gaps in knowledge. Significant minorities incorrectly believe that age (41%) and marital status (38%) are used in the calculation. And majorities wrongly believe that tax liens (64%), medical collection accounts less than six months old (62%) and civil judgments (63%) are used to compute scores.
So, in the event you fall into that knowledge-gap camp, here’s what you should understand about how it’s scored and the best way to raise that score.
• Obtain a copy of your reports: Go to www.annualcreditreport.com and download a free copy from each of the three main bureaus.
“Credit scores are an important piece of a person’s financial puzzle, and people should make every effort to improve it to get the best rates,” says April Lewis-Parks, director of education and corporate communications for Consolidated Credit.
Next, take a look at reports and identify mistakes and/or information you believe is inaccurate.
“If you believe something is inaccurate, by law you are allowed to dispute the item(s) with the bureaus to attempt to have it removed,” Lewis-Parks says.
Do that by submitting a dispute letter, together with any documentation or proof that the data is inaccurate. The bureau then asks your creditor or lender to confirm the information provided, Lewis-Parks says.
“If it can’t be verified, then the item must be removed from your report,” she says. “Also, if an item appears on the credit reports from all three bureaus, you will have to make your dispute to each bureau separately. The bureaus do not communicate and share information with each other.”
Remember that your score is calculated from your report.
• Take this quiz: To boost your credit knowledge, take the online credit score quiz at www.CreditScoreQuiz.org.
Understand the factors
Many factors affect your credit, and each represents a different percent of your score:
• Payment history counts for 35% of FICO, a commonly used score: To lenders, your history of payments indicates whether you’ll make payments on time in the future. A FICO score is a three-digit number calculated from the credit information on your report at a consumer reporting agency at a particular point in time. It summarizes information in your report into a single number that lenders will use to evaluate your credit risk quickly, consistently, objectively and fairly.
• Amounts owed count for 30% percent of your FICO score. Plenty of available credit relative to the amount owed indicates to lenders that you manage credit responsibly.
• Time period of history counts for 15% of your score. The age of your oldest account tells lenders the amount of experience you have handling credit.
• Mixture in use counts for 10%. Lenders will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
• New credit counts for 10% of your FICO score. To lenders, opening quite a few new accounts in a short window of time could indicate problems.
Your score could vary from provider to provider. Here’s the credit score ranges utilized by major scoring models, reported by credit.com:
FICO score range: 300-850
VantageScore 3.0 range: 300-850
VantageScore scale (versions 1.0 and 2.0): 501-990
Experian PLUS score: 330-830
TransUnion new account score 2.0: 300-850
Equifax credit score: 280-850
Come up with a strategy
“Building – or rebuilding – credit scores can be done, but it does take some time,” says Kristen Holt, president and CEO of GreenPath Financial Wellness. “It’s best to have a plan … and stick to the plan.”
Steps your plan ought to include
• Pay bills on-time: “If you fall past due, pay the bill as soon as you can,” Holt says. “Look into automatic payment options so you won’t miss a payment.”
• Keep card balances well under the limit: Holt suggests attempting to use no more than 40% of your available credit lines. And, if you would like to reduce or pay off multiple credit cards, Holt suggests paying off the one that has the smallest balance first, then pay the accounts down or off one at a time.
Linda Jacob, a financial counselor with Consumer Credit of Des Moines, Iowa, and author of “No More Paycheck to Paycheck,” advises against using more than one-third of your available credit on each and every card or line of credit.
“As soon as you go over the one-third, it is affecting your credit in a negative way,” Jacob says.
• Pay off negative/collection balance on report: As outlined by Holt, paying off old debt, including credit cards, collection bills and medical balances, allows you to avoid any additional collection or legal action that can become more damaging to your credit.
“Negative marks can remain on your reports for up to seven years or sometimes more, so the sooner they’re resolved, the better,” she says.
Have patience. “It may take some time to see improvement, but in as little as six months you can see positive results,” Lewis-Parks says.
• Keep inquiries to a minimum: “Opening and closing credit cards also can impact your score,” Lewis-Parks says. “When you apply for new credit, the lender makes a hard inquiry on your credit report, which might shave a few points off your score.”
• Have a nice mix: For those who just have a car loan, apply for a credit card too. You need to have an assortment of credit, Jacob says.