THE IMPORTANCE OF YOUR CREDIT SCORE AND WAYS TO IMPROVE IT

CREDIT SCORES AND RANGES

Credit scores are three-digit numbers (on a scale of 300 to 850) calculated from information about your credit accounts. That data is gathered by credit bureaus, the three largest being Equifax, Experian and TransUnion, and built into your credit reports. Your score can vary depending on which credit bureau supplied the credit report data used to generate it. Not every creditor sends account activity to all three bureaus, so your credit report from each one is unique. Creditors set their own standards for what scores they'll accept, but these are general guidelines:

• 720 and up is considered excellent
• 690 - 719 is considered good
• 630 - 689 is considered fair
• 629 and below is considered poor

Fortunately, when it comes to financing a mortgage loan, there are many programs that exist to meet a variety of credit requirements: VA, FHA, and USDA loans all have low- or no-down payment options, with flexible credit score minimums, enabling most people to have a credit score strong enough to buy a house. In addition to your credit score, your income and other debts may play a role in a creditor’s decision about whether or not to approve your application.

FACTORS THAT AFFECT YOUR CREDIT SCORE

The two main credit scoring models, FICO and VantageScore, consider many of the same factors, but weigh them a bit differently. For both scoring models, the factors that matter most are:

• Payment History (35%): Payment history, and your ongoing consistency in making on-time payments, has the biggest impact on your credit score. Late payments on all your previous and current credit accounts lower your score, and a mistake can be costly. Late payments of 30 days or more past the due date will stay on your credit history for years. If you pay your debts responsibly and on-time, it will work to your advantage in a significant way.
• Credit Utilization (30%): Credit utilization, or the amount you currently owe, is weighted almost as significantly as your payment history. The goal is to keep your balance-to-limit ratio to less than 30 percent, but the lower it is, the better.
• Length of Credit History (15%): Your credit score is also impacted by how long you’ve had your credit accounts. The longer you’ve had active credit and made timely payments, the better your score will reflect. Where you can’t necessarily control how long you’ve had credit, you can focus on being as responsible as possible with the way you manage your money.
• Credit Mix (10%): Having a variety of credit types such as, home/auto loans, credit cards, and personal lines of credit also have a minor positive influence in calculating your score. It’s not, however, advised to open several new accounts for this reason.
• New Credit (10%): Whenever you open a new line of credit, an inquiry is performed that can negatively affect your score. Shopping for a home, however, is the only exception. All mortgage inquiries within a 30-day period count as a single pull.

WAYS TO IMPROVE YOUR CREDIT SCORE

There are a number of fairly simple things that you can do to improve your credit score, but it takes time and effort. The length of time it will take depends on the reason your credit score is low. If the biggest negative factor is credit utilization, paying off your balances can drastically improve within a single month. If your credit is low due to multiple collections and poor payment history, then it will take several months of on-time payments to see any positive movement in your score.

• Review Credit Reports: Pull a copy of your credit report from each of the three major national credit bureaus and review them carefully. Check for incorrect or late payments, credit limits, missing accounts, and fraud so your credit history and FICO score accurately reflect your current financial activity. If you see any errors, notify the appropriate credit bureau within 30 days of the report date and have any inaccurate items removed (especially late payments).
• Pay Bills On-Time: Avoid late payments at all costs. As a reminder, outstanding debts more than 30 days past due account for 35% of your score. Use paper or digital filing systems to track your monthly bills, set due-date alerts or automate bill payments from your bank. If you are highly disciplined, charge all of your monthly payments to a credit card and pay the balance in-full monthly.
• Lower Credit Utilization: If possible, pay off your credit card balances each month. If you can’t always manage that, keeping your total outstanding balance at 30% or less of your total credit limit will help to lower your credit usage. Work toward reducing that to 10% or less, which is considered ideal for improving your credit score. In addition, asking for a credit-limit increase can help improve your credit utilization, provided your balance doesn’t increase as well.
• Limit Requests for New Credit: Soft inquiries, such as checking your own credit, giving a potential employer permission to check your credit, and checks performed by financial institutions you already do business will not affect your credit score. Hard inquiries, such as applications for a new credit card, loan or other forms of new credit will adversely affect your credit score for anywhere from a few months to two years.

• Keep Old Accounts Open: The older your average credit age, the more favorably you appear to lenders. If you have old credit accounts that you aren’t using, don’t close them. Though the credit history for those accounts would remain on your credit report, closing credit cards while you have a balance on other cards would lower your available credit and increase your credit utilization ratio. Shred those cards and leave the account balance at zero, even if a card is 10 or 20 years old.
• Deal with Delinquencies: If you have delinquent accounts, charge-offs or collection accounts, take action to resolve them. For example, if you have an account with multiple late or missed payments, get caught up on what is past due, then work out a plan for making future payments on-time. That won’t eliminate the late payments, but can improve your payment history going forward.
• Consider Consolidating Your Debts: If you have a number of outstanding debts, it may benefit to you to apply for a debt consolidation loan or balance transfer to a credit card with low or no interest rate options, leaving just one easy payment to manage. With a lower interest rate on the loan, or 0% interest on the balance transfer, you’ll be able to pay down your debt faster. Keep in mind, balance transfer fees are typically 3% to 5% of the transferred amount, but is often worth it to consolidate.
• Avoid Using Cash Only: As budget-savvy as it may sound, avoid cash-only spending. No credit = bad credit in the eyes of a lender. Therefore, use your credit cards for occasional purchases, being careful to not spend outside your budget, and pay the balance off monthly. Doing this will have the greatest positive impact on your score, again improving your credit utilization percentage.
• Track Your Progress: Using credit monitoring services are an easy way to see how your credit score changes over time. These services, many of which are free, monitor for changes in your credit report, such as a paid-off account or a new account that you’ve opened. They typically give you access to at least one of your credit scores from the three major credit bureaus, which are updated monthly. Many of the best credit monitoring services can also help you prevent identity theft and fraud. For example, if you get an alert that a new credit card account that you don’t remember opening has been reported to your credit file, you can contact the credit card company to report suspected fraud.

Improving your credit score is an important goal to have, especially if you plan to apply for a home or auto loan or strive to qualify for one of the best rewards cards available. Be patient, as it can take several weeks, sometimes months, to see a noticeable impact on your score. Small as it seems, every change you make toward repairing your credit counts. Bumping up your score may get you an interest rate even 1 percent lower, with the potential to save you hundreds of dollars a month on your mortgage. Remember that scores will fluctuate. As long as you keep it in a healthy range, those variations won’t have an impact on your financial well-being.