With many Americans finding their 2018 income tax refunds a mere shadow of what they had been, now is the time to review your credit report to ensure it’s in good shape–without that annual windfall to take care of old bills, you’ve got to be more strategic in how you manage your debt. Worse, if you owe any taxes for last year, it’s imperative that you get your finances back on track so your borrowing power is strong.
How Credit Bureaus Work
To really understand how you can get your scores up, you need a quick primer on how the three main credit bureaus work. Creditors–bank card issuers, mortgage companies, store cards, student loans–send the details of your new account to one, two, or all of the three main credit bureaus. Those three–Experian, TransUnion, and Equifax, are the gatekeepers to your ability to borrow money. Every month, your creditors let the bureaus know that you made your payment on time–or not. They also track the date the account opened, the opening balance, your credit limit for bank and store cards, how much available credit you’ve used, and your monthly payment. This data–and the number attached to it–gives a prospective creditor a snapshot of your financial health.
Credit bureaus are also where collections show up–everything from unpaid power bills from your grad school apartment (that you thought your roommate paid) to medical collections are reported. Lots of people are shocked to find they have these collections; if the power company had no forwarding address to send a bill, they have your Social Security number, and they file the collection.
Any data on your credit report stays for seven years, per the Fair Credit Reporting Act.
Improving Your Credit Scores
Although there are a number of companies who promise quick results to get your numbers up–they advertise 100 points in just a couple of weeks–you can easily do it on your own. All you need is a copy of your report, and some time with your Heritage Financial Credit Union loan officer. Bankers understand the dark arts of credit scoring, and will give you the right advice–free.
If your credit scores are in need of help, chances are pretty good it’s not a huge shock for you. Any time you’ve had unforeseen expenses and been late on a car payment, or gone over your Visa limit, the activity has a negative impact on your overall number. With some discipline and focus, you can move your numbers up in just a few months. If money is tight, cancel Netflix, eat at home, and curb any unnecessary spending while you’re in repair mode.
Get Everything Current
Make sure you’re current on all your accounts. When a lender looks at your report, they want to see a continuous line of I1A and R1s–that tells them you’ve made all your payments, on Installment and Revolving accounts, within 30 days of the due date. An I2 or R2 means you were more than 30 days late with the money.
An aside–if you’ve gotten behind on your car loan–and seven million Americans are more than 90 days behind–talk with your lender about a workaround payment plan. A repossession, or any derogatory reporting, stays in your file for seven years.
Pay Down Small Balances
Lots of us have lots of store cards–30% off for opening that account at Banana Republic or Best Buy is too good to pass up. Pay off those cards, same thing for a Visa or MasterCard with a low balance. It will take a few weeks, but that’s the fastest way to see a score boost. Don’t close the accounts; an open account with a zero balance is something lenders love to see. Oh–and don’t use them again, either. Use your debit card for small purchases.
Consolidate Your Debt
If paying off small accounts isn’t an option, consolidate. Bundling all your small bills into a personal loan, or a card with low interest when you transfer balances, does two things. It lowers your payments and utilization–one card with a large balance is preferable to lots of small balance cards.
Pay On Time
Anything that goes without saying clearly needs to be said–pay your bills on time. Nothing–and I mean nothing–improves your credit scores as much as monthly diligence in paying your bills. The magical algorithms that the bureaus use like it when you use credit–even if you can, don’t pay bills off and close the accounts.
In that same vein, leave old debt reporting as long as the bureaus hang on to it–seven years. This demonstrates a responsible use of debt–you opened an account, you paid it off, you’re a good risk.
Increase Your Credit Limits
Asking your card issuers to increase your credit limit will bump your score up some–if your limit is $2000 and your balance is $1800, you’ve pretty much used all of it. If they raise your limit to $3000, your utilization goes from around 95% down to 60%–just pretend it’s still $2000 and don’t use any more!
Collections come in many forms–medical, utilities, and from unpaid cards and other unsecured debt. Medical collections will not have an negative effect on your scores, but the other ones will.
Unless you pay the balances on cards, they are there for seven years. Where problems really pop up is when the card issuer charges off the debt for non-payment, and then sells it to a collection agency. That’s when the letters and phone calls start–and they’ll report, too. It’s not uncommon for the debt to be sold a third time–and the process begins again. Ultimately, you’ve got three or four derogatory trade lines for one account. You can ask the bureaus to note that they are all duplicate accounts and possibly have them removed, but the initial debt remains until it’s paid or old.
Experian is one of the three main reporting agencies, and they have a new reporting platform designed to improve your scores quickly. Experian Boost is an opt-in service that gives you bonus points for paying your cell phone and utilities on time–you’ve been doing it for years, so why not let it benefit you?
Managing your credit scores isn’t a full time job, but it does require regular check-ups. At HFCU, the goal is to keep you financially healthy and ready for what’s next in your life.