What Should I Do To Improve My Credit Score?

In order to improve your credit score, it is first important to understand what a credit score is.  Your credit score is a three-digit number generated mathematically using information from your credit report. Your credit score is designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations within the next two years.

There are a multitude of credit-scoring models in existence, but there is one that dominates the market: the FICO credit score. It is estimated that 90 percent of all financial institutions in the United State use FICO scores in their decision-making process.  FICO scores range from 300 to 850, and the higher your credit score, the better.  A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion.

How do credit bureaus determine your credit score? 

  • Credit bureaus examine your payment history.  They look at whether you have paid bills on time, or if there are any delinquencies within the past several years.
  • The amount you owe plays a part in determining your credit score.  Basically, the less money you owe the better.  The amount of available credit you are using on revolving accounts is heavily weighted.
  • The length of your credit history is taken into consideration.  The longer your credit history, the better your credit might be.  A short credit history may have a negative effect on your score, but a short history can be offset by other factors, such as timely payments and low balances.
  • Do you frequently apply for credit applications?  Applying for too many recent accounts may negatively affect your score.  Even if you have been pre-approved for a credit card, or if you are simply filling out a credit application to receive a free gift, this may lower your credit score.
  • Many credit-scoring models consider the number and type of credit accounts you have. A mix of installment loans (i.e. car loan) and credit cards may improve your score. However, too many installment loans or credit cards might hurt your score.

It is important to know that repairing bad credit takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. It may take longer than you anticipate, but remain patient.  Your hard work will pay off.

If you are committed to repairing your credit, the first thing you need to do is to review your credit reports.  The way to do this is to go online and obtain your free reports, available annually at several different sites; simply Google ‘free credit report’.  You can review your credit reports from each of the three credit agencies once a year for free.  Keep in mind that your credit reports will not include your FICO credit scores.  If you also want to know your FICO credit score, you will have to pay a modest fee for this additional information.

Review all three reports carefully to be certain that all the information listed is accurate.  If you see something that you do not recognize, or there is inaccurate information, you can file a dispute through the same site.  It may take a couple of weeks before you hear back, but if the credit reporting agency cannot obtain confirmation of the item disputed, it will automatically be removed.

Second, making your credit payments on time is one of the biggest contributing factors to your credit score. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account.

Third, after knowing what you owe, you should work towards paying off old debt or past due debt.  If necessary, contact the creditor and make arrangements to pay off debt over time or negotiate a discounted balance.

Fourth, you should try to ensure that you borrow less than 50% of the credit available to you on your credit lines or credit cards.  For example, if your credit card line of credit is $ 5,000, you should owe less than $ 2,500.   This is one of the most important factors in determining your score.

Finally, remember that your credit score costs you money.  The better your score, the better rates you will be eligible for when purchasing things like automobile insurance and a mortgage loan.  Did you know that a version of your credit score is usually used to determine your car insurance rates?  Cell phone companies may require you to make a large deposit if you have a low score.  And if you are a renter, landlords may use your score to determine if you would be a responsible tenant- and they can legally deny your application if they think your score does not measure up.  Potential employers may also run a credit report on you to determine how responsible you are. Even though they will not be given a credit score, they may use your credit history in the hiring decision.

Essentially, the key to getting a good credit score is pay your bills on time, keep account balances low, and take out new credit only when you need it.  Paying all your debts on time and as agreed will ensure a good credit score- make it one of your most important habits.  Improving your credit score will take time, but your hard work will pay off and you will be rewarded.

by Bernard D. Headley II
Community Bank of Oak Park River Forest

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