Remember in high school when you were told that if you do bad in a class or a semester, you still have the other semesters to make it up? Credit scores are kind of the same concept, except it involves your entire life. Not everyone has a perfect financial journey and credit scores flow with that.
A credit score is generated from your entire financial history. It is based on what you earn, amount of debt you owe, how much credit you have available, collections, delinquencies, and a number of other smaller factors.
Your entire financial future is determined by three credit bureaus: Experian, Transunion, and Equifax. They rate your risk to lenders by giving you a FICO score between 300-850. FICO credit scores determine if you are worthy to receive a loan, how much you can buy, and at what interest rate you can have the loan for.
The magic number to keep in mind is 30%.
The concept of FICO scores were invented in 1989. Before that, one would just walk onto a car lot or bank and ask for a loan. Then some hot shot leaned back in his chair with his feet on the desk would take a look at you and then decide whether or not he would give you a loan.
In the 1990s, FICO scores were determined by information gathering and thousands of people were employed to do it. Workers with telephones, pens, and paper would have paper files on people. Credit scores would then be given based on certain criteria like income generation, debts, revolving credit, loan amounts, and any public records like bankruptcies.
Today, everyone’s credit scores are determined by a machine. This is very important to understand because everything you do affects how that machine is going to judge you and determine your credit scores. The scores are based on an algorithm that is constantly changing with our volatile market and your entire life gets calculated into this algorithm which then generates your scores.
But machines are objective so there are no tricks to it. You just have to convince the machine that you are a very good credit risk. Below are some tips to raise and maintain a high credit score.
Keep Your Credit Card Limit Under 30%
Credit cards have been the best invention the financial industry has ever had. Give people a plastic mobile loan with interest rates as high as 32% and watch the money pile up. And if you do not have a credit card then you are not building credit. How about that for a Catch-22?
Everyone should have at least 3 credit cards and you should use all of them. Credit cards are the best way to build credit history because they are easiest to use and having at least 3 will show more credit history faster. This does NOT mean go out and max them all out. Maxing out your credit cards and paying the minimum balance will show that you are an irresponsible borrower which will not please the machine and cause your credit scores to go down.
The magic number to keep in mind is 30%. You do not want to go over 30% of the credit limit on the card. Let’s say for instance you have a card with a credit limit of $1,000. You should not have a balance of more than $300 on the card. By staying around this number, you are proving to the machine that you can borrow money responsibly. Responsible borrowing will please the machine and you shall be rewarded with a higher credit score.
Some people borrow more but pay it all off when the bill is due. This method works great and the machine will be pleased. Just make sure to use the cards every month if you don’t carry a balance. You want to have a credit history so the machine will have a record of how good of a borrower you are.
For instance, I have some cards I don’t really use, but if I’m somewhere and I need to buy a pack of gum or fill up some gas, I throw the amount on those cards and pay them off at the end of the month. It will show well in my credit history and my scores will be more favorable.
Do Not Miss A Payment On a Loan
So this one is pretty obvious. Whether it is a credit card or a car loan, do not miss a payment. In the event funds are really tight and you think you are going to miss a payment, call the loan agency to let them know ahead of time and ask them what your options are for it to not count against you.
Delinquent borrowers are an expensive nightmare for a credit agency, so it would actually be cheaper to work with you on it. Sometimes they can postpone the due date to a later date or they can cut out the interest to make it easier for you.
There are ways to work on it, so do not just skip a payment and make it up later. If they record the missed payment with the credit bureaus, the machine will be not be pleased and your credit score will be lowered. Try to avoid this so your credit goes unaffected.
Get Rid of Collections on Your Report
Believe it or not, a collection for $4.45 will affect your credit as much as a collection for $4,000. The machine does not necessarily care about the amount of the collection, it cares more about the fact that there is a collection on your record.
Collections suck. Sometimes you forget what the collection was for or maybe you just didn’t care enough about it because it wasn’t much anyway, but every month it’s on there it’s affecting your credit. If a missed payment becomes a collection, then you should put your negotiation skills to work.
The amount in dispute has most likely gone through a number of credit collection channels who have bought the debt for much less than what is owed. For example, if you owed a $300 electric bill from your utility company, but now the collection is showing a company name you have never heard of, then that company is most likely a collection agency that bought the $300 debt for much less. It will want to make a profit from you by collecting the whole debt.
Call the collection agency and negotiate the amount. Be adamant that you can only afford so much and that they need to understand your situation if they want the debt paid. Unfortunately, it will open you up to receiving phone calls from them to get the debt paid, but if your intention is to pay it, then it will only last a little while anyway.
After you pay it, have their guarantee that they will report the payment to the credit bureaus. It could take up to 60 days to reflect on your credit report. Getting rid of collections pleases the machine and it will cause your credit scores to go up.
Report Identity Fraud
Identity fraud happens every hour and is plaguing people worldwide. Usually breaches in identity fraud come in batches where a hack happens somewhere that can obtain very personal information of thousands and millions of people at once. The crooks then separate the info into piles to sell in the underground market.
If you see a collection, loan, or credit card that you do not recognize, alert the credit bureaus right away. They will open an investigation and find the fraud. The investigation will be ongoing, so be ready to take their calls and answer all their questions so that you can be freed of these false accounts. I have heard nightmares with regard to identity fraud so everyone should be vigilant with their credit reports.
Check Your Spouse’s Credit Report
Marriage can be a beautiful thing, but you should really check your spouse’s credit before tying the knot. In a state like California, the debt of one spouse becomes the debt of both spouses. So you do NOT want to be liable for some stupidly expensive purchases your spouse made when you were both single.
I know asking for your loved one’s credit score is a little weird and they may even take it as an insult, but you both need to understand that your credit scores will soon be run together for purchases of homes and cars in the future. Do you really want to ask mom and dad to cosign on stuff because your spouse has terrible credit?
If your credit is stellar and your spouse’s is not, or vice versa, start making a plan to bump it up by clearing out the weeds and taking control of it. It will bode better for the both of you, long-term.
Credit Management is Long-Term
Your credit should not be a surprise number that you find out about when you apply for a loan. You should know what your credit scores are and what your report says.
Credit cards today now give you a monthly update on your credit score along with accounts associated with your account. Take advantage of them so you can get a better picture of where your credit is and how you can make it better.
Your credit score is now a part of you and follows you everywhere you go. Do not fear it. Do not make an educated guess as to how it will help. You need to understand that everything you do feeds into the machine and will affect the algorithm that generates your score. There is no magic involved.
Treat your credit score like a diet. See what you’re doing wrong in order to correct it and then manage it in order to make sure you are in good straits. If you can get above a credit score of 680, you’re doing well. Get it over 750 and you’ll be a very good credit risk which will result in lower interest rates and higher credit limits.