We rely on credit for many of our purchases, most often our vehicles and our homes, since these are high dollar items that we do not pay for in cash and typically require a loan. Credit reports are a very important part of your financial stability and your ability to get credit for various items for acceptable fees and rates. A good loan package is worth quite alot more than you might realize when you look at the bottom line of any interest-accruing debt. You may end up paying double the price of your purchase by the time the interest has compounded over the life of the loan. For example a half-million dollar home may end up being a million dollar home when all is said and done. One of the major determining factors will be your credit score and how this affects your interest rate.
Credit scores are also sometimes referred to as FICO (Fair Isaac Corporation) scores. Credit, or FICO, scores range from being in the three hundred range to above eight hundred. The terms used will range from poor to excellent and will be referring to what kind of a credit risk you are. An average credit score in the United States, according to the major credit reporting agencies, is between 620 and 660. Scores below that and you may want to do some repair work to raise it and lower the amount of money you are shelling out in interest payments that aren’t profitting you at all.
Many of the things you can do to improve your credit score will simply take time, such as improving your payment history or lengthening you employment history with the same company, but there are several things that you can do to quickly watch your score increase. The following are six steps that you can take to get some fast results and start down the path of credit repair and/or correction.
STEP NUMBER ONE-Get a copy of your credit report.
Order a copy of your credit report. Everyone is entitled to one free report per year. To obtain this, go to www.annualcreditreport.com and request it. It is an easy process that takes very little time or effort. They will give you the reports from the three major United States credit reporting agencies, which are Equifax, Experian, Transunion. If you have recently requested credit and have been declined, you should receive a letter stating the reasons per U.S. law. On the back or bottom of this letter is a number you can call to get the reporting agency’s credit report free of charge, as well. However you choose to go about getting it, having a copy of your credit report in hand will be your first step.
There is also the freecreditreport.com that most of us have seen the commercials for. If you choose to obtain your report through this company, however, be very wary and read all the fine print carefully. They are actually trying to get you to sign up for a credit monitoring service that is far from free. You can get the credit report without any cost, just as they say, but you will need to be sure and cancel the service once you receive it to avoid any charges being accrued.
You can certainly contact the three reporting agencies directly to purchase your report by following the links below and the user-friendly instructions that are provided there. You will be asked to provide your personal information (including your social security number), your contact information, and payment information. These are secure sites and to ensure that you are who you say you are, you will also be asked questions about yourself and your creditors that you should know, such as what year you obtained a loan from a particular company in.
Equifax
P.O. Box 105873
Atlanta, GA 30348
http://www.equifax.com
(800) 685-1111
Experian (formerly TRW)
P.O. Box 2104
Allen, TX 75013-2104
http://www.experian.com
(888) 397-3742
Trans Union
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
http://www.transunion.com
(800) 916-8800 or (800) 888-4213
Keep in mind that most of the free methods of obtaining your credit report will not include the actual numeric score unless you pay a relatively minimal fee to have it included with the report.
STEP NUMBER TWO-Check for errors.
When you receive your credit report, go over each item thoroughly. There may be mistakes in the report that are lowering your score. This is not as uncommon as we hope that it is. Aside from the debts listed, check on your former addresses and names that are listed. If one of these is inaccurate, it can cause big problems. If you find an error, or something that you question or don’t fully understand, highlight it to go back to when you have gotten through the entire report.
When you are finished, call the agency that is reporting the bad debt to try and resolve the issue there. If they agree with you, ask them to remove the debt and to report it to the credit agencies immediately with an explanation that it was an error and should be removed from the report and no longer reflected in your score. Request confirmation of removal from your credit report as soon as this is done. Do not assume that it will be if you have not seen it for yourself.
If you get no satisfaction there, you may need to contact the credit reporting agency next. The law in the United States of America allows them forty-five days to investigate the matter and get back to you, but your follow up is again important. Explain your situation and ask them to begin dispute resolution proceedings on the matter. When the investigation is complete, the consumer reporting company must give you the written results and a free copy of your report if the dispute results in a change. (This free report does not count as your annual free report under the FACT Act.) If an item is changed or deleted, the consumer reporting company cannot put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider.
If nothing is resolved there, it may become necessary to contact an attorney to represent you.
STEP NUMBER THREE-Balances and limits.
When you have your credit report accurate, or are at least on your way to getting it that way, take a look at your balances on items such as credit cards, department store cards, fuel cards, etc. and compare the balances you are carrying to the credit limit you are approved for. It helps your credit score if your balance is between fifteen and twenty-five percent of the total credit limit. Pay your balance down to this point as quickly as possible and keep it there. Carrying no balance doesn’t add anything to your score, although many people believe that to be the case. It is best to carry less than twenty-five percent of your total income in debt. If you can get it down to fifteen percent, even better yet!
Another thing that you can do to build credit, if the problem is that you have essentially none thus far, is to obtain a loan on something (auto loans work well for this) and pay on it for a full six months before paying it off. Be certain that the company receives your payments on time or early and that they are for at least the minimum amount due each month. If you pay the loan back in full before the six months are up, the credit reporting agencies may not apply it and therefore, it will have no impact on your credit score at all.
STEP NUMBER FOUR-Get rid of federal debt.
Federal debt is a killer to your credit score, so eliminate any that you have as quickly as you possibly can. Items such as student loans that have went into default and back taxes are particularly harmful. The federal government is very good about reporting bad debts in a timely manner and they will bring your score down significantly. If you have this kind of debt, contact the governing agency even before you pay it off. The federal government may be willing to reduce the debt by eliminating some of the interest. Negotiating with them is something they are accustomed to and since the worst thing that can happen is that they say no, they can’t help you and you are still where you started, it’s worth a quick call, isn’t it? If you can’t pay it in full, you can at least set up a payment arrangement that will show on your credit report. As long as you make the payments faithfully, your score will improve after a time, most likely around six months.
STEP NUMBER FIVE-Improve debt-to-income ratio.
Your debt-to-income ratio will effect your credit score in either a positive or a negative way. If your debt appears to be too high for your income, you will have a lower credit score. You may want to consider either paying off some of the debt or finding a way to increase earnings. Increasing earnings may be through a higher paying job or a second job. If you are going to try and get a higher paying one, though, be careful. There are times such as when you are trying to apply for a mortgage or a car loan that your time with your current employer will be considered heavily. In these situations, it is best to take on a second job for a time and keep the one you have your time in at. Occasionally, a potential creditor will accept even non-continuous employment as though it were if you are changing companies within the same career field for an obvious benefit.
According to http://www.saygoodcredit.com/calculate/calc-ratios.html the debt-to-income ratio is calculated by:
“dividing your fixed monthly debt expenses by your gross monthly income.
As a basic rule, you should live within the following percentages:
monthly housing debt expenses including taxes, insurance: 25-28%
other credit obligations (credit cards, auto loans, student loans, etc.): 10-15%
your total debt obligations should be around:
36-40%”
This site provides a virtual storehouse of information, as well as a worksheet you can print out that will assist you in figuring your debt-to-income ratio out and a calculator.
STEP NUMBER SIX-Get help.
If your debt seems out of control, consider contacting a credit counseling service. These companies can assist you with creditors and help you to come up with a plan that will get you into a better situation over time. They may be able to get your interest payments lowered or stopped entirely for a time. They will also be able to put an end to creditors calling you constantly for as long as you are working with them and following the plan set up for you.
For information on organizations that help with credit counseling, contact:
National Foundation for Consumer Credit
8611 Second Avenue
Silver Spring, MD 20910
http://www.nfcc.org
(800) 388-2227
Another thing to look into is the possibility of obtaining a home equity or a debt consolidation loan. These loan varieties often have lower interest rates than many of your other creditors, which can lower your payments and help you to pay things off faster.
Your credit score will be based upon several factors.
1.
Your payment history about 35% of a FICO score
Have you paid your credit accounts on time? Late payments, bankruptcies, and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.
2.
How much you owe about 30% of a FICO score
FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.
3.
Length of your credit history about 15% of a FICO score
A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.
4.
New credit about 10% of a FICO score
If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.
5.
Other factors about 10% of a FICO score
Several minor factors also can influence your score. For example, having a mix of credit types on your credit report credit cards, installment loans such as a mortgage or auto loan, and personal lines of credit is normal for people with longer credit histories and can add slightly to their scores.
According to the “Sixty Second Guide to Perfect Credit” that can be found at http://www.fool.com/personal-finance/credit/60-second-guide-to-perfect-credit.aspx there are several things that are found in a perfect or near-perfect credit report. These are:
Between four and six revolving accounts (meaning credit cards).
At least one “installment” tradeline (e.g., a mortgage or auto loan) in good standing.
A few accounts around 20 years old with a long history of positive use. (To get into the 800 range, you need 10 years of positive account history.)
Around 30 years of credit use.
No late payments (or other account blunders) for at least the past seven years.
Very few credit inquiries (no more than one to three in a six-month period).
No derogatory notations – collections, bankruptcies, or bad accessorizing. (Just kidding on that last one.)
Debt levels on credit accounts of less than 35% of their overall credit limit.
Your goal will be to get these types of items on your credit report and see your score rise to the top of the pile. Of course, some of these things take time, such as obtaining thirty years of credit use. It will give you an idea of where you should be heading, though.
Credit scores can save you money, or cost you money, depending on how high or low they are. High interest loans for those who are considered high risk borrowers will eat up your budget and cost you much more than you want to pay for whatever the item is. Improving your credit score can take a bit of time and some work, but these quick tips will get you on your way down the path toward financial benefit and freedom. You will even get excited to see it soar higher. Improving your credit score can actually be a fun venture. With patience, you can take it as high as you want.
Sources:
http://www.saygoodcredit.com/calculate/calc-ratios.html used in step five and in quotes
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm used in step two
http://www.fool.com/personal-finance/credit/60-second-guide-to-perfect-credit.aspx
http://www.pueblo.gsa.gov/cic_text/money/creditscores/your.htm