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By Susan Doktor, Guest Author
We all make mistakes when it comes to money. Overdrawing your checking account. Loaning your not-so-reliable cousin money a hundred bucks. Giving in to the temptation of buying some new gear when your bank balance is shouting, “No!”
But some mistakes can be more costly than others—and in ways that aren’t immediately apparent. We’re talking about the ones that have an impact on your credit score. Creditworthiness can have a profound effect on your financial future. So it might be time to raise your credit awareness and improve your credit score.
Step One: Get Your Free Credit Report
You can download your free credit reports from each of the three major credit reporting bureaus (Experian, TransUnion, and Equifax) in one fell swoop. Normally, you are limited to one free credit report per year but at least one credit monitoring bureau, Experian, is currently allowing consumers to download their reports monthly for free. That’s a new policy instituted in response to the coronavirus pandemic.
Step Two: Understanding Your Score
There are five key factors that determine your credit score:
- Credit monitoring services view your record of on-time and late payments as the most important consideration when determining your score. Perhaps the most common mistake people make is thinking they can pay their bills just a little bit late and not suffer any consequences.
- Ironically, owing no money to anybody can be a detriment in establishing good credit. Unless you have some history of borrowing money, you’re an unknown quantity. That makes you riskier than someone who has borrowed a lot of money and paid it back. So it’s a good idea to borrow a little money and pay it back regularly, even if you don’t need to. Find a low-interest all-purpose credit card and use it occasionally to establish a strong credit history.
Your outstanding debt, particularly when seen as a portion of the credit limits various creditors have placed on you, also influences your credit score. Having a lot of maxed-out credit cards isn’t good for your credit. Many credit advisors recommend that you use only 30% or less of your credit limit to achieve an optimal credit score.
- The type of debt you have, or your credit mix, can also influence your score. Debts that are secured by property, like mortgages and auto loans, are considered less risky than, say, credit cards and personal loans. They’re less likely to raise the eyebrows of credit monitoring services.
- Since credit monitoring is all about measuring risk, new credit accounts can also bring your score down, particularly if you open a lot of them in a short time. That’s a signal to credit monitoring bureaus that you may be living beyond your means. One mistake people make is jumping at too many promotional offers too quickly. Just because you can save 15% on a purchase by opening a store credit card, doesn’t mean you should. The cost to your credit score might not be worth it.
Step Three: The Fine-Tooth Comb Treatment
Once you have your report in hand, it’s essential to go through it very carefully. Some of the credit “mistakes” people make aren’t actually their own, but rather due to incorrect information on their reports. Still it’s up to you to find them, otherwise you own them as much as you do a genuine late payment.
Identity theft is an increasingly common crime. It can be devastating to your credit score and your finances overall. For many victims of identity theft, it’s only when they examine their credit reports that they get the news they’ve been victimized. Thieves can quietly run up huge balances on fraudulent accounts before you’re ever contacted by a creditor regarding a late payment. So study your report carefully to be sure there are no unfamiliar credit accounts listed on it.
Check for duplicate accounts, which can also bring your score down, and for misreported late payments. Bear in mind, too, that credit reports are dynamic and normally refresh themselves over time. You are legally entitled to have a variety of negative marks, including late payments and charge-offs, removed after seven years. So be on the lookout for old information.
Step Four: Repair Your Credit
It’s not easy but it can be done. There are three ways you can approach credit repair. The first is to approach each of the three credit monitoring services directly with your documented complaints. This can be time consuming because, by law, credit bureaus can take 30 days to respond to any complaints you file. The back-and-forth can be frustrating but if you stick with it, you will be rewarded. The second way is to approach individual creditors directly. When a creditor removes a negative report, it should be reflected in all three of your credit reports. Creditors also have the incentive of wanting to maintain a relationship with you and may be very cooperative if you find legitimate, well-documented errors. Finally, you can engage a professional credit repair service to manage the whole process for you. That’s the costliest alternative but it can also be the least frustrating. No matter which route you choose, patience pays off.
Author Bio: Susan Doktor is a journalist and business strategist who hails from New York City. She writes on a wide range of subjects, from real estate, finance, and technology to food and wine. Follow her on Twitter @branddoktor.