Are you considering applying for a mortgage or a car loan sometime in the near future? Have you checked your credit report recently? It is better to know ahead of applying for a big loan. There would be nothing worse than getting your hopes up to make that big purchase only to find out that there are some unexpected items on your report. The lending environment has not really improved much despite the improvements that we have seen in the financial sector since the market downturn in 2008-09. In order to secure good lending rates, your credit score has to be in excess of 700-720.
Credit scores range from 300 to 850, and are compiled by three companies: Equifax, TransUnion and Experian. You are eligible to request your credit report once per year for free by logging into Annual Credit Report. Congress passed a bill a few years ago that requires all credit service agencies to make this option available to all consumers who request their report. You can request the reports all at the same time, or space them throughout the year. The reports will show all of the credit sources and balances you have in your credit record, but it will not provide your credit score (FICO score). You can request the score for a fee from the credit agencies. If you find credit sources that do not look legitimate, you can contact the credit source and initiate an investigation.
Once you find out what is on your report and your score, what can you do to improve your chances to get the best lending rates? There are a few basic things you can do.
The first few things have to do with how you manage your credit cards. First, it is always a good idea to pay down your balances, and the more unused credit you have available the better. One old adage was to pay down the credit cards with the highest interest rate first. This may help you from an interest cost perspective, but will not necessarily help your FICO score. It is much better to attack the cards with the highest balances first. You can improve your credit score by getting your outstanding balance below 30 percent of the available credit.
Next, be sure to check your report to confirm the amount of credit available on your cards. Credit card companies do not always update your personal credit record with the rating agencies. You may have gotten an increase in your available credit line, but the agencies may not have been informed. As a result, the balance you are carrying would show up as a larger percentage of the available credit. This would hurt your score. Here is a quick example: if you had $5,000 in available credit and got an increase to, say, $8,000, the $2,000 balance you had on the card would show as 40 percent of the available balance under the $5,000 scenario and only 25 percent with the increase to $8,000. Remember that 30 percent is the target threshold.
If you have any old open credit accounts it could be helpful to use these accounts once in a while to help maintain the benefit that these credit lines may have on your credit score. Simply charging small amounts and paying the balances off right away is sufficient to help in this regard.
There are a couple of other things you can do to help enhance your score. First, trying to get the report of a late payment off your credit record can enhance your score. Some lenders will honor a request to update your report if you have been making payments continuously for a number of months. Next, pursue negative entries that may appear on your report. It is not uncommon for obscure charges (often small and insignificant) to be sent to collection agencies that can ultimately wind up on your credit report. In this day and age, this happens often with medical insurance-related claims where you may be disputing charges with your insurance company.
Hopefully some of these tips can help you improve your score and get you the best rates available for that new home, car or other purchase.
Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.
Jim Heisler, CFP®, CDFA™, CASL™
Family Wealth Services, LLC
8725 Frankford Avenue
Philadelphia, PA 19136