I wrote this Ultimate Guide to Improve Your Credit Score to help everyone improve and maintain great credit. Before I was a teenager, I learned how to pay the bills … not with my money, of course. My parents immigrated to the USA from South Korea, so they couldn’t read or write English as well as I could. I wrote the checks to pay our bills which were often past due. Their credit reports were a mess but I learned how to fix them.
Back in the 80’s, you could fix your credit reports simply by disputing anything derogatory in writing. The truth didn’t really matter because if the creditors didn’t respond within a set time, the credit reporting companies had to remove the derogatory ratings–snail mail worked to our advantage! This often worked because the creditors rarely responded to any trivial disputes. It used to be so easy to improve credit until the internet arrived and changed everything!
9 Reasons Why You Need Good Credit
Dave Ramsey is anti-credit. Most people ought to follow his advice because they’re in too much debt and live from paycheck to paycheck.
“Your credit is your financial credibility.” ~Darren@learntobegreat.com
Here are 9 reasons why you need good credit:
1. Buy a Home. If you’re able to pay cash for your home, you don’t need to read any further. However, if you’re like the vast majority of us, you’ll need good credit to be approved for a mortgage. Additionally, having a high credit score will qualify you for the best interest rates.
2. Rent a Home or Apartment. Maybe you’re not interested in buying a home and plan to rent a place instead. Your credit doesn’t have to be great, but it better be fair or good otherwise it might be difficult to rent a decent place.
3. Get the Best Car Loan Rates. I recently took out a car loan to pay for my wife’s new car–I know–but my interest rate is only 1.5%! I got this low rate because my credit is excellent.
4. Get the Best Car Insurance Rates. Insurance companies use information from your credit reports to formulate their own proprietary scores which are different than FICO or Vantage scores used by lenders and employers. These “credit scores” could impact how much you’ll pay in car insurance premiums more than any other factors including your driving record!
5. Get a Job. A job in fast-food service will probably not require a credit check. However, if you’re looking to find employment in government, finance, security, or management, having good credit will be important. I would not have my current job if I had bad credit.
6. Start a Business. Maybe you’re not interested in seeking employment and plan on starting a business instead. Won’t your business require some starting capital? You’ll probably consider taking out a business loan which is going to require decent credit.
7. Get a Line of Credit. A line of credit is a flexible way of purchasing things. Instead of buying things that will only depreciate in value over time, why not use a line of credit to invest in real estate? Savvy real estate investors use lines of credit to purchase their next investments.
Before you consider investing in real estate, it’s important to know why you should not invest in real estate. If you decide this is a route you wish to pursue further, I’ll have future articles posted.
8. Get Paid to Use Credit Cards. If you’re paying interest on your credit card balances, stop! Your credit cards should pay you for using them. What do I mean? You should be earning cash back or rewards points for your everyday purchases and bill payments. I have several cash-back and rewards credit cards that pay me over $1000 a year just for using them because I pay my balances off in full every month. Sounds great, right? There’s a catch. You have to have very good or excellent credit to qualify for the best cash back and rewards credit cards.
9. Get the Best Cell Phone Deals. Okay, so you’re living in your parents’ home, work at a minimum wage job, use public transportation to commute to and from work, don’t plan on starting a business, and have no credit cards. You still have friends and want a smartphone, right? Well, many major cell phone carriers will want to check your credit history before they’ll give you the best deals on the latest cell phones.
The FICO Score was created by the Fair Isaac Corporation and is the credit scoring system that over 90% of all lenders use. Although there are several FICO scoring models to keep up with consumer trends and different lender’s needs, I’ll refer to FICO® Score 8 which is the most commonly used FICO scoring model. The national average FICO Score is 695 but a score from 740 to 850 (the maximum) will qualify you for the most credit at the best rates.
What Makes Up a FICO Score?
- Payment history (35%) – Making all your payments on time is one of the most important factors in maintaining a good FICO Score.
- Amounts owed (30%) – As a general rule, you want to stay below 30% utilization of total available credit. For example, if you have a $10,000 credit limit, you should stay under $3000. However, people with the highest credit scores keep their utilization below 10%. My utilization is less than 3% because I always pay my credit card balances in full each month. Please keep in mind that lenders report to the credit reporting companies at different times of the month. Consequently, your credit reports may show actual balances even though you pay them off each month and do not pay interest.
- The length of credit history (15%) – People with the highest FICO credit scores have accounts with an average age of 11 or more years. The oldest account has been open 25 years on average.
- Credit mix in use (10%) – It’s best to have several different types of credit history such as a mortgage, car note, and credit cards.
- New credit (10%) – People with the highest FICO credit scores opened a new account once every 2.5 years on average.
For more information about the FICO Score, download their booklet [here].
The Vantage Score is the other major credit scoring system that Equifax, Experian, and Transunion created as an alternative to the FICO Score. Vantage Scores are slightly different than FICO Scores because they are more favorable to consumers. However, if you’re shopping for a mortgage, the FICO Score will most likely be used to determine your credit worthiness.
If you’re simply tracking your credit score, the Vantage Score is more readily available for free. A Vantage Score from 661 to 780 is considered “Prime.” Anything from 780 to 850 (the maximum) will qualify you for the absolute best rates.
What Causes Your Credit Scores to Drop?
The following will negatively impact your credit scores:
- Missed payments
- Credit card or revolving debt balances that are too high
- Closing an account that causes the average age of your accounts to decrease significantly
- Opening a new account that causes the average age of your accounts to decrease significantly
- Too many hard inquiries on your credit reports
Checking your credit report has no negative impact on your credit report or credit score. Only hard inquiries, such as applying for credit, will lower your credit score and show up on your credit report.
How Do I Find Out My Credit Score?
Ask your lender for your credit score(s) if you’ve applied for credit. They are not required to provide you the actual credit score but they often will. Ask and you shall (often) receive.
Credit Karma is awesome! Create an account online for free and you’ll be able to monitor your Vantage Scores and information from your credit reports whenever you want.
According to the FTC, “you must be told if information in your file has been used against you. Anyone who uses a credit report or another type of consumer report to deny your application for credit, insurance, or employment – or to take another adverse action against you – must tell you, and must give you the name, address, and phone number of the [company] that provided the information.”
Credit Reporting Companies
All three credit reporting companies would love for you to sign up for their premium credit monitoring services. For a one-time fee of approximately $40, you can get all three credit reports and scores. For monthly access to each of the credit reports and scores, you’ll have to pay about $20 per month.
I recommend that you get your free copy from only one credit reporting company at a time, wait four months and get your free copy from the second credit reporting company, wait four months and get your free copy from the third credit reporting company. Repeat this process every four months.
The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
- February 15 – Equifax
- June 15 – Experian
- October 15 – Transunion
What’s In My Credit Report?
Your credit report is a record of your credit activity and credit history. It includes the names of companies that have extended you credit and/or loans, as well as the credit limits and loan amounts. Your payment history is also part of this record. If you have delinquent accounts, bankruptcies, foreclosures or lawsuits, these can also be found in your credit report.
- Personal Information: Your full name along with variations that have been used, current and past addresses, date of birth, social security numbers and its variations, and employer information
- Accounts: Revolving credit and/or installment loans including account status, contact information, credit limits or loan amounts, recent payments, and individual or joint responsibility
- Payment Information: Monthly payment information on all accounts
- Public records: Bankruptcies, tax liens, and civil judgments
- Debts: Debts owed on all accounts including mortgages, credit cards, and auto loans
- Hard inquiries: Every time you apply for credit, a “hard inquiry” is placed on your credit report
- Negative information: Including late payments, collections, settled accounts, repossession or voluntary surrender, charge offs, and other derogatory items
How Does Information Get on My Credit Report?
Every month, lenders submit updates to one or more of the three credit reporting companies—TransUnion, Equifax, and Experian. Not all lenders report to all three credit reporting companies. This is why the information on your credit reports may vary. Additionally, lenders report at different times of the month.
Who Has Access to My Credit Report?
Other than the credit reporting companies and potential lenders, the Fair Credit Reporting Act restricts who has access to the information on your credit report, and the law also dictates how your report can be used.
How to Improve Your Credit
How Long Does Negative Information Stay on My Credit Report?
Before we discuss how to improve credit, it’s important to know how long bad credit stays on your credit reports. That way, you’ll do everything in your power to always maintain good credit.
- Late payments: 7 years
- 7 years for completed Chapter 13 bankruptcies
- 10 years for Chapter 7 bankruptcies.
- Foreclosures: 7 years
- Collections: about 7 years, depending on the age of the debt
- Public Record: 7 years, but unpaid tax liens can remain indefinitely
Improve Your Credit Score by Improving Your Credit Report
1. Make all payments on time, always and forever, Amen! This is the most important way to improve and maintain good credit.
- Schedule auto-payments of all bills.
- Set up payment reminders for bills that you must manually pay. I have recurring notifications set up on Google Calendar that remind me to pay my bills before they’re due, especially credit card payments.
- If you have missed payments, suck it up, get current and don’t miss any more payments.
- Paying off a collection account will not remove it from your credit report. It will stay on your report for 7 years.
- If you can’t make your payments, contact your creditors or see a credit counselor.
2. Apply for credit only when you need it. Too many hard inquiries will lower your score.
3. Keep balances low on credit cards and other revolving credit. Ideally, you should pay your credit card balances monthly in order to get cash back and reward points.
4. Don’t close unused credit cards in order to increase the age of your open accounts. You may have to use these credit cards occasionally because some lenders will close inactive accounts after one or more years of inactivity.
How to Dispute Credit Report Inaccuracies
Learn about each credit report company’s online dispute process, file a dispute, or check on the status of your dispute for free by clicking on the respective companies’ links below:
What Can I Do if I Cannot Remove Negative Information from My Credit Report?
You can submit a statement to the credit reporting company that explains why you have negative information. For example, you can provide a statement that might reasonably explain why you had late payments. Hopefully, your justification will be strong enough to convince a lender, insurer, or employer to give you the benefit of the doubt.
Credit Repair Companies
If all else fails and you’re interested in hiring a credit repair company to fix your credit reports, here’s a good review of different credit repair companies that should help you decide which one to go with.
Unless you’re a billionaire and plan on paying for everything in cash, you have to have good credit. Check your credit scores and information from your credit reports as often as you’d like for free using Credit Karma. Once every four months, check your official credit report for accuracy from one of the three credit reporting companies until you’ve seen all of them in the span of a year. Repeat. Most importantly, always pay your bills on time by setting up automatic payments and calendar reminders of bills due.
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