Understanding Your Credit – Recap
Today is part two to my last blog, Understanding your Credit Report. If you haven’t read before, click here. We talked about the importance of your credit. It’s going to be hard, as a matter of fact nearly impossible to get away from your credit score impacting you in one way or another. Potential employers, landlords, credit card and loan companies, Verizon, T-mobile, your utility company, banks… all of them use your credit report to make a decision about you.
Think of your 3 digit score as a grade on how well you’ve done in your personal finances in the last seven to ten years. This grade is used to determine if someone will let you borrow money, provide you with their service, or hire you. The good news is you might still get approve; the bad news is it will cost you, probably thousands of dollars more than if you had a higher score. We also went over how to get your three free credit reports over the course of a year and why you’re credit score will be different depending on where you look.
Reviewing Your Credit Report
First, go ahead and take out your free credit report, let’s go over the different parts of your credit report. I downloaded my Transunion report so if you have an Experian report or Equifax, the sections might look a little different but the information is going to be generally the same.
The first part is your personal information, it shows the last four of your social, date of birth, and names, addresses and telephone numbers reported. There’s also a section for employment data reported mines was blank and I wasn’t sure why. Turns out it’s because it will only list companies that have pulled your credit report for verification in the last 2 years. Well I’ve been in the military for the last 20 years!
The only thing that was incorrect in this section for me was one of the last names listed, Godson, which sounds about right since my last name is always getting misspelled. I will need to file a dispute with Transunion to get that corrected.
Next, there is the rating key which is a really nice feature on the Transunion report because its color coded; so of course we want to see nothing but green. But you can easily see how well you’ve been doing OR NOT doing just by looking at the colors.
Accounts On Your Credit Report
Now we get into the meat and potatoes of the credit report…. information on all the accounts that the companies have reported. It will start off with adverse accounts, accounts that are not in good standing. Hopefully you don’t have any or too many accounts under the bad boy OR girl list. This is one of the areas that you have to pay the most attention to because it significantly impacts your credit score.
First check to see that all the accounts really belongs to you, that you haven’t been a victim of identity theft. If you are looking at your Transunion report and have accounts in this section, look for where they have placed the brackets, they tell you why it’s not in good standing. It will most likely be because you missed one or more payments.
If all the accounts are yours then make sure that the information the lender is reporting is correct. Did you really miss a payment? Is the balance correct? If you find anything wrong or inaccurate, contact the lender to get it fixed.
Then it will list your satisfactory accounts and you should see nothing but green because you have been paying them on time. There will be accounts on there that are open, but you will also see ones that are closed because they stay on your credit report for 7 years.
So go ahead and make sure that all these accounts are really yours. You might be tempted to overlook this section because they are satisfactory but you never know. There might be accounts on there that you didn’t open, it happens more than we think.
The Other Sections
After that is the regular inquiries section. This is another section that you need to pay special attention to. Here you will find a list of everyone that has requested credit information for you in the last two years. Make sure that everyone listed on there is a company you have worked with to get a loan or service. If not, someone might have tried using your information to open an account.
There’s also a section for promotional and account review inquiries. I won’t go into what each section means, you can get more information on that on the report but just know that nothing listed here affects your credit score. Lastly, it will lists how you can contact the agency in case you see something wrong or inaccurate on your report.
Make sure you take time out to review your credit report every 4 months to make sure it is accurate because the things on this report are used to determine your credit score.
What Affects Your Credit?
There are 5 main factors that affect your credit. Your credit history, the amount of debt that you have, the length of your credit history, new credit and the different types of credit that you have also known as credit mix.
But all five factors are not created equal. Some factors impact your credit a lot more than others. Below you see that two factors: the amount of debt that you have and your payment history make up 65% of your credit score, so those are the ones that you need to make sure you don’t mess up because if you do, you will see a huge impact on your credit score.
Your Payment History
Your payment history, the biggest factor, makes up 35% of your credit; so it’s important that you take this one seriously. The first thing any lender wants to know is whether you’ve paid your credit on time. Your credit history is a good indicator of what you are going to do in the future. No one wants to lend money to someone who has a history of not paying it back or not paying it back on time.
Make at least the minimum payment on every single one of your debts. Plan for this by including all your bills in your budget and making the payments a priority before spending any money on wants.
If you have fallen behind on your payments, the longer you wait to make a payment, the more negatively it will impact you. A 90-day late payment is much worse than a 30-day late payment and multiple late payments are worse than one late payment. Late payments will stay on your credit history for seven years but the older the account is, the less it will continue to impact your score.
If your payment history is not that good, some things that you can do to improve your credit history is make a payment on that bill as soon as possible, you don’t want it to go to collections which it will if you haven’t made any payments after 180 days. Reach out to the lender and see if they can work out a payment plan with you and possibly even remove the late payments from your credit. Lenders would rather work with you to get their money than sell the debt to a third party when it goes to collections for a fraction of the price.
But before you call them, drink some chamomile tea, hot milk, do your mantras, some deep breathing exercises, anything to get you in the right frame of mind. The bible says, a gentle answer, or word, turns away wrath but hard words stir up anger. Make sure you are polite and courteous, you are trying to get them to do something for YOU.
If you don’t get an answer you like, here is a trick that has worked for me a few times to negotiate the price for cable and my cell phone bill but it can work with any company. If you don’t get the answer you like, wait a few days and call back. You will most likely get someone new so try again to see if you can get an answer you are happy with. About 50% of the time, I ended up getting a better deal. Try it out and let me know if it works out for you!
Your debt makes up 30% of your credit. But creditors aren’t so worried about the actual amount you owe, they care about how much you owe compared to how much credit is available to you, this is called credit utilization.
Let’s take Jessica and Maria as an example. Both only have one credit card and both owe $1,000 on it. The difference is Jessica’s credit card has a limit of $5,000 and Maria’s limit is $1,000. Maria is maxed out and she has a credit utilization of 100%. Jessica on the other hand, same about of debt right, has a credit utilization of 20%. Same amount of cards, same amount of debt but a different credit limit means a 80% difference in credit utilization. Maria’s credit is going to take a big hit.
Be mindful of how much of your available credit you are using, use a small % of your credit, less than 20%. If you have high credit utilization and have the extra cash, pay down some of your debt. You will see an improvement in your credit score in a few weeks because lenders report your balance to the agencies every month. Keep working hard to bring down that debt.
Another possible solution, and please only do this if you are disciplined enough not to go crazy…. call the lender and ask them to increase your credit limit. You get 100% of what you don’t ask for right? If you get approved, increasing your credit limit will help bring down your credit utilization without having to make any extra payments. But you know yourself!!! Don’t do this if it’s only going to get you into more debt. And even if you get approved, keep working hard to bring down that debt!
The Other Three Factors
The other 3 factors make up 35% of your credit. 15% of it is your credit history so start building it up as soon as possible. Open up that Express card that I talked about in my last blog (just make sure you make the payments on time and pay it off, unlike my example!) Once you have had it for 6-9 months apply for a starter credit card.
Pay your bills on time, keep the credit utilization rate low and next thing you know you will be eligible for those coveted credit cards like American Express Platinum. More importantly though, your credit score will be high and you will get good deals on loans.
New credit makes up 10% of your credit. This looks at how many times you have attempted to open new credit in the last two years. Applying for too much credit over a short period of time makes creditors think you might be experiencing some financial problems which means you are a higher credit risk. So don’t start applying for a lot of credit all at once, especially if you don’t have a long credit history.
The last 10% of your credit is determined by your credit mix, the amount of revolving and installment accounts that you have. Revolving credit includes things like credit cards and department store cards. In revolving credit you have a credit limit and you can continue to borrow against it over and over again.
Installment accounts usually require a fixed payment each month until the balance is paid down in full. Home mortgages, auto loans and student loans fall under this category. Since this only makes 10% of your credit though, don’t start opening up different types of accounts just to try to improve your credit.
Experian one of the 3 major credit agencies is offering a free way to possibly increase your credit score, it’s called Experian Boost. It works best for people with a short credit history. If you religiously pay your utility, cell phone bill or streaming services on time, you can choose which one of these to add to your Experian report and it will very quickly boost your score up because it’s showing positive payment history which makes up 35% of your credit score. Click here if you want more information.
Keep It Up!
You don’t need a lot of money to build a good or excellent credit score, anyone can do it. As long as you spend within your means and always pay your bills on time, you are on your way to a good credit score and then an excellent credit score. I know that there are some financial experts that are against debt. I believe in using debt for your benefit but that can only happen if you are able to get good rates and offers and use it responsibly. Comment down below and let me know how you feel about debt.
To Your Finances,