We all know that a credit score is an important barometer
of our financial health. A low credit score can block you
from getting credit cards, mortgages, and car notes. A
mediocre credit score may mean that you're only eligible
for high-interest loans, not the good deals that your
friends may be able to land. If you've got a bad credit
score, don't despair. It can be fixed.
In the U.S., consumers have both a credit report and a
credit score. Your credit report is actually a fairly
complex file of financial transactions that provides
information on your various loans (credit cards,
mortgages), how you've handled credit, along with
information on where you work, what you earn, and any court
cases you're involved in. A credit score is a number,
typically between 300 and 850, that gives an overall
"snapshot" of how you manage your finances.
In the U.S., Fair Issac & Company came up with a system to
translate the bulk of data in the credit report into the
snapshot credit score. Today, those scores are called FICO
scores (for the name of the company that invented them).
Three major credit bureaus maintain credit records:
TransUnion, Experian, and Equifax. All of them use a
version of the FICO score.
The good thing about credit reports is that they move
forward with the time. The good thing about credit scores
is that they balance what you do right against what you do
wrong. This means that if you do more things right than
wrong, even starting today, you can eventually clean up
your credit.
Fixing your credit report is slow, steady work. You can't
do it overnight. But you can do it. The opposite is also
true. Good credit today will not last if you don't keep
doing the right things.
So what should you be doing to have a good credit report
and good credit score?
The FICO score balances a lot of different activities. If
you understand how the credit bureaus think, you'll know
how to improve your scores (and you'll be wiser in how you
deal with money).
First, pay bills on time and keep paying them on time. If
you're already in arrears, work out a plan to get back on
track and keep up with payments. Late payments can really
hurt your score. One late payment can offset many on-time
payments!
If you have credit cards, try to keep no or a low balance.
A maxed-out card is bad for the report, but a card with a
reasonable balance is fine. Reasonable is not a dollar
amount! What's reasonable for one is not reasonable for
another. There should always be a big difference between
the amount of credit at your disposal and the amount of
credit you're actually using at any one time.
If you have a lot of credit card debt, it is better to
consolidate it into one large debt than keep getting new
cards and moving the debt around. In fact, the website
http://myfico.com says that if you have a certain amount of
debt, it will be better for your credit score if it's a
larger amount on one card than the same amount on several
cards.
On the other hand, don't get a bunch of credit cards you
don't plan on using. Having a bunch of available credit
that is never used can hurt your score; it looks like
you're preparing a way to go head-over-heels into debt.
If you do apply for new cards or loans, do not go crazy. A
sudden increase in credit card applications can lower your
score. The best strategy is to apply for new credit and
loans only as needed.
If you had a financial disaster, whether a bill went to
collections, a house went into foreclosure, you defaulted
on a note, or you went bankrupt, be aware that the
information about that problem can stay on your report for
years, even if you have paid off the debt or otherwise
managed the problem. A collection account can stay on your
report for seven years.
Seven years may seem like a long time, but you can
eventually "outlive" a bad financial mistake. If you had a
bankruptcy 20 years ago, that information will no longer be
on your credit report. In fact, you could have sterling
credit 20 years later despite that financial misstep.
Furthermore, do not think that lenders are in any way
obligated to use your credit report or your credit score.
Lenders are free to lend to anyone they choose. Most
lenders do, in fact, pull a credit report (that's called an
"inquiry") but they will likely consider other factors,
including your income, the type of loan, and whether or not
they have had previous dealings with you. (That latter
information can be bad news if you've ever not paid them on
time-another good reason to keep your bills paid on time!)
Credit scores change constantly. Every single month,
information is updated. Do enough things right, and the
good reports will outweigh the bad. That gets encapsulated
into the score, which is really just a snapshot of your
overall credit health on that day.
You can obtain a copy of your credit report at no charge
once a year or if you are turned down for a mortgage; you
can also get your credit report at any time for a nominal
fee. The best resource for getting credit report
information is http://www.annualcreditreport.com. They work
with all three credit agencies and can help you get your
yearly free report and provide some general information on
credit reporting.
Lenders are in the business of lending money. They don't
want to do that foolishly, but they don't want to keep
credit-worthy borrowers away, either. The credit report is
designed to be accurate and reliable to help borrowers get
the credit they need (and can manage responsibly) and
advise lenders as to which consumers are the most likely to
repay a debt.
----------------------------------------------------
Did you know that debt consolidation is one of the few
programs to manage overwhelming debt that can actually help
rather than hurt your credit score? Debt consolidation is
not for everyone in debt and, some people may not qualify
for it. To learn more about what debt consolidation is and
how it can help, check out
http://www.debt-consolidation-diva.com . Mandy Karlik wrote
this article and she contributes regularly to
Debt-Consolidation-Diva.com.
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