In Smart Money, see ways to improve your credit score.
WHAT IS A CREDIT SCORE?
- A credit score is a statistical measure of the likelihood that a person will repay debts in a timely manner.
- The most common metric is the FICO® created by Fair Isaac Corporation.
- FICO® scores range from 300 to 850, with a higher value being more favorable.
- FICO® scores are determined using five categories of data.
- Payment history (approximately 35% of a FICO® score)
- Amounts owed (approximately 30% of a FICO® score)
- Length of credit history (approximately 15% of a FICO® score
- o New credit (approximately 10% of a FICO® score)
- Types of credit used (approximately 10% of a FICO® score)
ANALYZE YOUR CREDIT REPORTS
- Obtain copies of your credit report from each of the three main credit reporting agencies (TransUnion, Equifax and Experian) by visiting www.annualcreditreport.com. Be prepared to answer questions to verify your identity.
- Read your credit reports carefully to identify inaccurate, outdated or incomplete information.
- Look for late payments that may have been incorrectly reported.\
- Verify the accuracy of the balances owed on current accounts.
- Ensure that old accounts have been listed as closed.
- Dispute errors with the credit bureau in writing.
- Specifically explain which items you are disputing and why you are disputing the information.
- Consider photocopying your credit report and circling the disputed items.
- Inform the creditor in writing that you are disputing their information and provide supporting evidence.
RE-ESTABLISH A GOOD TRACK RECORD
- Although late payments lower a person’s credit score, re-establishing a pattern of positive payments should impact your credit score favorably.
- The impact of prior problems fades with the passage of time.
- Recent activity impacts your credit score more than older activity.
WHAT TO DO AND WHAT TO AVOID
- DON’T rely on quick fixes; they may be more harmful than helpful.
- DO develop a debt-reduction plan and stick to it!
- DO specifically attack balances on revolving credit (e.g. credit cards).
- DON’T simply transfer balances.
- DON’T open several new accounts just to make more credit available.
- DON’T open accounts too rapidly because this will reduce your average account age.
- DO understand that closed accounts continue to be reported in your credit reports and may be factored into your score.
- DON’T close a revolving credit account solely for the purpose of improving your credit score because this may actually increase your credit utilization ratio. However, DO close a revolving credit account if you have difficulty disciplining your spending and the account would entice you to spend beyond your budget.
- DO ask creditors to report favorable history to the credit bureaus if they have not been doing this.
Courtesy: Chris Harper, Hungerford Nichols
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