“Credit is a system whereby a person who cannot pay gets another person who cannot pay to guarantee that he can pay.”
– Charles Dickens
How’s your blood pressure?
Most people know the answer to that question. “Too high” is a pretty frequent answer—especially in the U.S.
And if you’re one of those people with high pressure, chances are…
You’re trying to do something about it! You’re watching your diet, trying to exercise and reduce stress…even taking medication.
Well, your credit score is a lot like your blood pressure. It’s an easy way for a lender to measure your financial health. And sometimes, even if you have good income and a good balance sheet, you can still have dings on your credit.
According to a recent survey by the Consumer Federation of America, more people are checking their credit scores than ever before – and those who do are better at managing their credit than those who don’t.
Just like lowering high blood pressure—or maintaining healthy blood pressure—cleaning up your credit and maintaining a solid credit score can take some work.
These five no-brainers go a long way to clean up a credit score.
#1 Check Your Score
You can’t improve what you don’t know, right?
Checking your score is the easiest, most logical first step toward improving your credit – but it can also be confusing. Start with the basics to make sure you understand where your score comes from and how it impacts your financial health.
There are three major credit bureaus in the U.S. – Equifax, TransUnion, and Experian – all of whom receive data on your lending history, and make it available to other lenders who are interested in loaning money to you.
These credit bureaus are required to provide you with a free credit report once per year. Knowing what’s in your report is the first step to improving your score.
To get your free credit report visit Annual Credit Report.com or call 1-877-322-8228. Beware of copycat sites that are not authorized by federal law. Sites like ‘Free Credit Report.com’, for example, are not the official site for free annual credit reports from all three reporting agencies.
Once you have the report in hand, it’s important to check it for accuracy. Mistakes can happen, but your creditors don’t know that…unless you correct them!
What you won’t find on your credit report, believe it or not, is the actual number of your score. Several companies offer credit scoring, and the FICO score is the most widely used.
You can still get your actual score though. Third party sites – like CreditKarma.com – offer estimates of your FICO credit score, and you can even go to myFICO.com for a free Credit Score Estimator; but if you want the real number, you’ll either have to pay for it or get a credit card that monitors and keeps you up to date on your score and any changes to it.
So you’ve requested your report, verified the data, and checked your FICO score. How do you know if your score is any good?
Well, a score above 700 is usually viewed as pretty good. You can go as high as 850 on the current charts.
If you are below 750, or just a competitive person, you may have some work to do.
#2 Communicate with Your Creditors
Job losses, medical emergencies, or unexpected expenses…all these things can prevent you paying your bills on time…or even at all.
When that happens, your credit score suffers.
When these problems arise, contact your lenders immediately and let them know!
Believe it or not, creditors understand that life happens, and they’d much rather try to work with you than treat you like a bad loan. They want to get paid. They don’t want to fight you for your money.
For example, they may change the date your payment is due…or reduce your minimum monthly payment amount, which can help avoid late payment penalties. Most companies are willing to work with you to come up with a fair solution.
Your creditors want to be paid, and if you ask, they may work with you.
#3 Be Reliable and On Time
Creditors want to know how reliable you are, and being predictable is the key indicator of that.
Just like getting six-pack abs from doing a few crunches every day, a good credit score is all about consistency over the long-term.
While it may feel good to make a big payment that puts you back on track to paying down a debt, it won’t do much to improve your credit score.
Why? Because lenders want to know that you are in this for the long haul.
Anything that shows inconsistency, such as a string of missed payments, hurts your score. Even public records like bankruptcy, tax liens, and civil judgments all show up on your credit report and can paint you in an inconsistent light.
It’s better to make small payments regularly—and in proper amounts—than to make huge payments at uncertain intervals.
Reliability is the name of the game. Be consistent. Be reliable. Potentially increase your score.
#4 Apply for New Credit Sparingly
When creditors see you with established, long-term loans that you regularly pay off, that increases their confidence in you.
On the other hand, if they notice you applying for NEW lines of credit too much, that’s a warning sign—adding more debt could make it harder for you to make payments.
Here’s how it works; whenever Lender A requests your full credit report from the credit bureaus, it’s called a Hard Inquiry. This gets recorded on your credit report, while Soft Inquiries – such as part of an employer background check – do not.
Hard Inquiries indicate that you are adding more debt, which means less income you will have available to spend on Lender A’s debt. While it might seem counterintuitive, your score actually drops over the short-term when you obtain new credit.
Too many Hard Inquiries, and your score could suffer. According to myFICO.com, people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.
New credit can be viewed as an increased opportunity to get into trouble. Whether it’s a new credit card, a home loan, or any other form of credit, having a new line of credit will make your score dip.
The longer you have that form of credit though, and the more payments you make on it, the higher your score will rise.
#5 Keep Credit Cards Open (Even If You’re Not Using Them)
Just as important to your score as paying down debt quickly and efficiently…is how far back your credit history goes.
The longer you have open lines of credit the better—even if you’re not actually making purchases of substance with your credit cards. Here’s a tip from Forbes on how which cards to keep:
“Closing credit card accounts will hurt a credit score. Experts recommend keeping the oldest card active as long as possible, even if it is used just once or twice a year. The longer a card is open, the more it positively affects a credit score. Length of credit history makes up 15% of a person’s credit score.”
The point is how long you’ve had them, and how long they’ve been in good standing.
Another factor that impacts your credit score is your Credit Utilization Ratio, which is your total debt divided by your total available credit.
Basically, if the amount of debt you have is relatively small compared to the amount of credit available to you, lenders can assume you are doing a good job managing your debt.
Keeping those little-used credit cards open could mean a better Credit Utilization Ratio.
However…too much of a good thing can also potentially hurt you.
If you have a larger credit limit (open credit cards) than you can afford to have—based on your income—you may have a hard time qualifying for new debt.
So be careful about maintaining too much credit at once.
“The only good loan is one that gets paid back.”
– Robert Wilmers, former chairman and CEO of M&T Bank
Is it just me or is some of this confusing?
You know how I sum it all up? With these credit truths:
- Don’t spend more than you make.
- If you use a credit card always, always, always pay 100% off each month.
- If you get a car note or a mortgage, never ever miss or be late on a payment. Ever.
That’s it. It is really that simple.
The bottom line? Have a plan to take your credit score seriously. A little diligence can go a long way.
It’s a no-brainer!
Join my Email Insider Group. Sign up to receive weekly tips and tricks on finance, education, home buying, insurance, Social Security and everything in between. Click HERE to become an Insider! Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation, and should not be considered investment advice. Any references to any specific commercial product, process, or service, or the use of any trade, firm or corporation name is for the information and convenience of the public, and does not constitute endorsement, or favoring by United Capital. Please contact your financial advisor with questions about your specific needs and circumstances. © Byron Ellis