By Joshua Huffman
NFCC certified financial professional
Most people are aware that their credit report is a determining factor in whether or not they get a car loan, a home loan, or a credit card. And that their credit score can impact the interest rates they are offered if they qualify for those types of credit. However, many don’t realize that their credit report can impact a great many other things in their lives.
According to a 2012 survey by the Society for Human Resource Management, 47 percent of employers check an applicant’s credit history before deciding whether or not they make a job offer. Insurance companies use credit history, among other things, to determine your premium. Want to rent an apartment? You better hope your credit report is in good shape.
Here are some ways you can improve your credit report and score.
- If you aren’t current on all debts, get current and stay current. Payment history has the biggest impact on your credit score, so keeping your accounts in good standing is important. If you have made mistakes in the past, that’s OK. You can always work to improve your credit. While negative information can appear on a credit report for up to 10 years, the last two years have the biggest effect on your score. If you fell past due on an account, get current and stay that way – and you see your score begin to steadily rise.
- Pay down your debts, especially credit cards. Credit scoring takes into account the ratio of outstanding debt to available credit. If you have a credit card with a $2,000 limit and you have a balance on that card of $1,800, you are using 90 percent of the available credit. That looks bad to the credit score models. It looks like you are close to maxing out your limit and therefore has a negative effect on your credit score. Ideally, keep your balances as low as possible for the best credit score. If your balances are high in relation to your limits, work to pay them down. In my opinion, the best way to use a credit card is to use it once every couple of months for a small purchase and pay the balance off right away. That way you don’t risk having the credit issuer close your account for inactivity, you don’t spend money on interest, and you build your score without going into debt.
- Focus on your oldest accounts. The longer you have had a credit card, the more impact it has on your score. A card that you’ve held for three years gives a much better idea of how you manage credit than one you’ve had for three months. If you are uncomfortable with the number of credit cards you have and are looking to close some, make sure you keep the ones that have been open the longest. By closing an old account, you could be losing some good history. It’s not often that I see credit scores in the 800 (850 is the top end of the FICO credit score). However, the credit reports I do see that have broken into the 800s almost always have accounts that have been open for years.
- Pull your own credit report. This is important for many reasons. For one, you really don’t know what you need to work on if you don’t know what is on the actual report. It is very common for people to come see me and have no idea what is actually on the report. Yes, there are lots of numbers, dates and different tables, but once you take some time to get familiar with it, it can make sense. If it doesn’t, you can always get help from people like me. The second reason you want to pull and review your own report is that errors can occur. It is really not that uncommon to find errors on credit reports. Some errors are minor and have no bearing on your score, but others can be significant and can really make a difference.
Everyone is entitled to a free credit report once yearly from the three major credit bureaus – Equifax, Trans Union and Experian. Go to annualcreditreport.com to get a copy of your reports. While you can get the entire credit report, it does not come with a credit score. However, keep in mind that the report is what drives the score. If you know your report and work to improve it, your score will move in the right direction.
Knowing your report and taking a few of these steps can really help to improve your credit and improve your financial health. Improving your score can mean lower interest rates on loans, lower insurance premiums, better access to housing, etc. A better score saves you money.
It isn’t always easy and it can take some time, but with hard work and determination, I have seen many people take control of their credit report. I have seen scores go from really bad to great in just a couple of years, sometimes even quicker. But remember, the longer you wait to take control of it, the longer it will take to get your credit report to where you want it to be.