Hanlon CPA’s 5 Steps To Affect Your Credit Score
Look, I don’t know what a Pokemon is, but with the kind of summer that our nation and world has been having, I suppose I can understand the appeal of plugging into an alternate reality and hunting weird, imaginary creatures.
With Baton Rouge (once again) in the headlines, and Nice, France revealing a new form of terror (on top of the events in Turkey, Dallas, Minnesota, Orlando, Iraq, etc.), we’ve had a pretty rough go of it. Especially if we allow ourselves, and our mindset, to be driven by the winds of media and 24-7 crisis.
But even for the most discerning of us, all of these events are sobering.
And they lead me towards thinking about being ready for whatever might come, whether it be circumstantial, financial, or otherwise.
One of the best places to start is to look at your existing debt loads, and what you can do about them. And then, once you’ve done that, you should examine your credit situation and what is and could be available to you in a pinch.
World crisis has a way of making our personal situations seem more urgent. And that’s a GOOD thing.
But aside from mobilizing for possible crisis, there are happier things to consider, for which your credit is a big deal. Purchasing a home, a car, etc. But I should hasten to add that using credit for discretionary purchases (even — perhaps, especially — for cars) is NOT something I would recommend.
But a very important aspect of your credit for a home purchase, or other such investment is, of course, your actual credit score (if you won’t be paying with cash). So if you have a large purchase in your near future that absolutely requires some kind of financing, what I’ve put together here will really help.
And regardless, it would be a valuable piece for you to look through, and have clarity about for the future.
Hanlon CPA’s 5 Steps To Affect Your Credit Score
“A man should always consider how much he has more than he wants.” -Joseph Addison
If you want to fix your credit score, you need to know what your current score is. Most creditors rely on the three-digit FICO credit score, which ranges between 300 and 850, when determining your level of risk as a borrower. The higher your score, the lower the risk is for the lender, and thus the better your interest rate will be.
On the other hand, low credit scores result in getting denied for credit, or getting credit at extremely high interest rates. Contact a credit reporting agency to obtain your FICO score, to see where you stand. You can get a free credit report, but to get the actual credit score from FICO (Fair Isaac Corporation) you will have to pay, usually around $20.
Mint.com and other services like Credit Karma and Credit Sesame all offer some variation of a “free credit score”, but they are NOT, in fact, the FICO score that most creditors rely upon. There are, in fact, dozens of “scores” that bureaus assign to your data, but the FICO is the most authoritative and commonly relied upon.
Once you have your credit report and score in hand, you can take the following steps to fix your credit score fast:
1. Pay Off Non-Installment Debt First
If you have credit cards, you’ll want to focus your debt repayments here first. Paying credit card bills on time, and paying down the balances or paying them off completely will improve your score faster and more than paying off installment loans (car, student, mortgage, etc).
2. Get Under This Threshold:
Focus on getting your overall debt below 30% of your available credit limit on each credit card and revolving account you have.
This increases the amount of your “available credit” and will improve your credit score as you will be seen as less of a risk. Look at your credit card balances and send higher payments to the cards with balances closest to the credit limit first — to work toward the goal of decreasing your overall debt to less than 30% of available credit limits. Once you’ve obtained that goal, you can focus on paying back high interest debts first.
Or, of course, Dave Ramsey’s “Debt Snowball” approach (wherein you tackle small debts first, building confidence as you go, to pay off larger debts faster) can be even more effective–especially if your goal is (wisely) to pay off all debts completely.
3. Only Use When Necessary
Try not to use your credit cards, even if you’re paying your bills in full each month. Each month, the balance from your last statement is reported to the credit bureaus, and whether you made your payment on time. Using a card that already has a balance isn’t going to improve your score, so save yourself the extra interest and stop using the cards while you’re working to improve your credit score.
Definitely do not use credit cards from issuers who don’t report your credit limit. For example, American Express tends not to submit a credit limit, which means the credit bureau assumes your highest balance is your credit limit. This will make it look like you’ve maxed out your credit card, which affects your score negatively.
4. Check Your Limits
Verify that the credit limits shown on your credit report match your actual credit limit for each credit card account. If the report is showing a lower limit than you really have, it can cause artificially lower credit scores — because it will appear you’re using more of your available credit than you really are. If you find an error, simply ask the credit-card issuer to update the information with the credit bureaus.
5. Fix Your Reports
Have your credit report corrected if there are errors with any of the following situations, as they negatively affect your credit score:
* Late payments, collections, charge-offs that you don’t think are yours
* Credit limits reported lower than they really are (as discussed above)
* Accounts which are listed as anything other than “paid as agreed” or “current”, including “settled”, “paid charge-off”, “paid derogatory”
* Accounts listed as unpaid that were included in a previous bankruptcy
* Any negative item older than 7 years that is still appearing on your report (it should automatically come off the report after 7 years — or 10, if you filed for bankruptcy)
I hope this helps — feel free to forward along to your friends, especially those who are considering a major purchase, such as a car or new home.
And, as I mentioned, we’re here to help.
Laura J Hanlon CPA
Laura J Hanlon CPA PA