Good Credit? Bad Credit? Unknown?
Do you have strong credit or are unsure of where you stand? Cleaning up your credit is essential before you make any major financial moves. A low or bad credit score (also known as a FICO score) can hurt your chances of being able to open a credit card, apply for a loan, purchase a car or even rent an apartment.
Trying to buy a home? It is especially important to have clean credit before you start the process. If your credit score is less-than-ideal, you may not receive a preapproval for a mortgage. And if you are unable to qualify for a mortgage, you may only be able to purchase the home via an all-cash offer.
Or, if your score is lower, but you are able to get pre-approved, you might only be offered a higher mortgage rate, which can be a huge addition to your monthly expense.
Here is an example of how a higher mortgage rate can really add up:
If you have a 30-year fixed rate mortgage of $100,000 and you are given a 3.92% interest rate, the total cost of your mortgage will be $170,213. However, if your interest rate is 5.92% on the same $100,000 mortgage, you will have to spend $213,990- that’s an additional $43,777 over the life of the loan! If you had secured the lower mortgage rate, you could have applied that additional savings to fund a four-year college degree at a public university.
So now that you know how important a good credit score is, how do you go about cleaning up your credit? Below is a collection of our best tips for improving your score.
Talk to a loan professional
Have a loan professional to check your credit score for you. A professional will be able to give you advice on whether your score is in the ‘good’ range for home buying. Did you know that multiple requests for your credit score can impact your score negatively? Having a professional ask ensures that you only record one inquiry. And once you know your score and where you stand, you can start taking action on improving your credit.
Change your financial habits to boost your score
Your credit score is made up of several components and here are a few of the big ones. Your payment history makes up 35% of your score according to myFICO. Outstanding amounts owed are 30% of your FICO score and another 15% is tied to the length of your credit history.
Payment History - Has your credit score been damaged by late payments or delinquent accounts? You can start repairing the damage quickly by taking charge of your debts. So., if you begin to pay your bills in full before they are due, and make regular payments to owed debts, your score can start to improve within a few months.
Amounts owed - What they are determining here is the percentage of credit that you’re currently using (also known as credit utilization). For example, if you have a $5,000 limit on one credit card, and you are carrying a balance of $4,500, then 90% of your available credit is used up for that card. You can improve your score by reducing that balance and free up some of your available credit. While there is no specific percentage quoted, we have heard anecdotally that they like to see the ratio at 30% or less. So, using the example above, you would want to keep your balance on that card below $1,500.
Length of credit history - If you’re trying to reduce debt by eliminating your credit cards, shred the card, but DO NOT close the account. You want to keep these old accounts open without using them to maintain a longer credit history and show you have lots of available credit.
Find and correct mistakes on your credit report
How common are credit report mistakes? Inaccuracies are rampant. In a 2012 study by the Federal Trade Commission, 20% of people identified at least one error on their credit report. In their 2015 follow-up study, almost 70% thought that at least one piece of previously disputed information was still inaccurate.
You will want to go through each section of your report systematically and make sure to take notes about anything that needs to be corrected. Once you have your list, you will need to contact the credit bureau(s) and /or lending institutions about getting the information fixed.
Below are several areas of a credit report where you will want to look for inaccuracies:
Your personal information
This is one area where it is quite common to find an error. And even a small error, like an incorrect address, can have a negative impact on your score. So, before you look at any other part of your report, you will want to review all of these personal details:
● Make sure your name, address, social security number and birthdate are current and correct.
● Are your prior addresses correct? This is especially important if you haven’t lived at your current address for very long.
● Is your employment information up to date? Are the details of your past employers also right?
● Is your marital status correct? Sometimes a former spouse will come up listed as your current spouse.
Your public records
This section will list things like lawsuits, tax liens, judgments, and bankruptcies. If you have any of these in your report, make sure that they are listed correctly and actually belong to you.
A bankruptcy filed by a spouse or ex-spouse should not be on your report if you didn’t file it. There shouldn’t be any lawsuits or judgments older than seven years, or that were entered after the statute of limitations, on your report. Are there tax liens that you paid off that are still listed as unpaid, or that are more than seven years old? If so, those all need to go.
Your credit accounts
Here is where you will see all of your credit and revolving accounts, like credit cards, department store cards, school loans, car loans and other debts. As you read through this section, make sure that any debts listed are actually yours.
For example, if you find an outstanding balance for which your spouse is solely responsible, that should be removed from your report. Any debts due to identity theft should also be resolved. If there are any accounts that you closed on your report, make sure that they are labeled as ‘closed by consumer’ so that it doesn’t look like the bank closed them.
Are there any unusual inquiries into your credit listed in this section? An example might be a credit inquiry when you went for a test drive or were comparison shopping at a car dealer. These need to be scrubbed off your report.
Report the dispute to the credit agency
There are three main credit agencies that collect data on you and provide FICO scores. They are Experian, Transunion and Equifax.
If you locate any major mistakes, you will want to take your disputes to the credit agencies to get them resolved. The easiest way to do this is to submit your report through the credit agency’s website. Experian, Transunion and Equifax all have step-by-step forms to submit reports online.
But if you locate and old information on your report that should have been purged from your records already, such as a debt that has already been paid off or information that is more than 7 years old, you may need to go directly to the lender or company involved to resolve the dispute.
This last part is key - You must follow up to make sure that any mistakes are scrubbed from your reports. You will want to keep notes about who you speak to and on which dates you contacted them. Check back with all three of the credit reporting companies to make sure that your information has been updated. Since all three companies now share data with each other, any mistakes should be corrected on all three reports.
If your disputes are still not corrected, you may have to also follow up with the institution that reported the incident in the first place or the third-party collections agency that is handling it. Then you will need to check with the credit reporting companies again to see if your reports have been updated.
If you can keep on top of your credit reports on a regular basis, you won’t have to deal with the headaches of fixing reporting mistakes. You are entitled to a free annual credit report review to make sure all is well with your information. If you make your annual credit review part of your financial fitness routine, you’ll be able to better protect your buying power and potentially save thousands of dollars each year.
How to clean up your credit now
Does your credit score need a boost so that you can buy a home or get a more competitive interest rate? If so, get in touch with us. We can connect you with the right lending professionals to help you get the guidance you need.