Go to annualcreditreport.com to review your three credit reports (Experian, TransUnion, and Equifax). Federal law states you will be provided this opportunity one time per year at no cost. Be careful, and avoid the sites that try to get you to pay. Review your report for mistakes and outdated information. Any information older than seven years must be removed. The exception to this rule is Chapters 7, 11, and 12 bankruptcies, which must be removed after 10 years. Here are some guidelines.
Credit Scores
- If you are below 600, you have a problem. If you get a loan, the interest rate will be high.
- If you have a number between 600-720, you are doing okay, but nobody at the bank is going to jump up and down when they meet you.
- If you are between 720 and 760, you will probably get a warm smile and handshake with your loan and a decent interest rate.
- If you fall above 760, they will roll out the red carpet and provide you with caviar and champagne and the best interest rate.
- If you are above 800, they will probably ask you for a loan!
Improving Your Credit Score
- Start by tracking your three credit scores for FREE at creditkarma.com and credit.com.
- Payment History: PAY YOUR BILLS ON TIME. This is not complicated. You either pay on time or you don’t. If you do, your credit score will go up. If you don’t, it will go down. Pay your bills on time!
- Credit Utilization: The bank wants to see you with a nice cushion between what credit you have access to and how much you actually use. They would prefer you to use less than 30%. I would prefer you use less than 10%. Cut your utilization rate, and the score goes up!
- Credit Card (how not to do it): Your credit limit is $10,000. On the day they check your balance, you owe $6,500. This means you are utilizing 65% of your available credit. It does not matter if you were making minimum payments on that credit card at the time or if you were going to pay it off in full. 65% is too high, and your credit score will be negatively affected.
- Credit Card (how to do it): Your credit limit is $10,000, and the day they check your balance, you owe $2,000. Now, you are utilizing 20% of your credit limit, and your credit score goes up. Even better, request an increase of your credit limit to $20,000 and if you get it, now your utilization rate is 10%. That is what you want! Let’s take a look:
- Length of Credit History: Having a home loan for many years will help. Having the same credit card for 10 years will help. These issues are important, but not as important as the first two points.
- Types of Credit Used: You will receive a plus for having multiple types of credit. Having a mortgage and a couple of credit cards will enhance your credit score just fine. Do not fall into the trap of getting more loans to increase your credit score. I wouldn't do it.
- Recent Searches: If you apply for many different types of credit (personal loan, store credit card, car loan, etc.), it will affect your credit score in a negative way if those are hard checks. Be mindful of allowing others to do hard checks on your credit score.
- Late payments; negative accounts; and collections, garnishments, bankruptcies, and liens: None of these are good. Make sure that what is on your report is absolutely correct, and if it is, get rid of it when they reach the seven- or 10-year thresholds. Do not count on the credit bureaus to do it for you. Take control of your credit. It is YOUR credit.
