Your credit score is the single most important 3-digit number that will ever be connected to your name. Why? Because those 3-digits are the gateway to you securing a low-interest rate on all sorts of consumer products, including financing a car, buying a house, getting credit cards, securing personal loans, and more.
If you’ve got a good credit score, then you will save yourself thousands of dollars in interest rates over the years compared to someone who has a low score, which makes striving for a good credit score one of the smartest money moves you can make.
Since it’s the start of a new year, it’s time to grab your credit report, check your score and get a plan in place to improve that 3-digit number.
There's a ton of confusion over credit scores, so I want to take some of the guesswork away and provide you with three tips to help you get your credit in check.
1. Grab your report
Your credit score, or FICO score, is a 3-digit number ranging from 300-850 (the higher number wins) from three different credit bureaus: TransUnion, Equifax, and Experian. It's important to note that you could have three different scores with each of these bureaus because different loan companies report to different credit bureaus.
Everyone is entitled by law to a free copy of their credit report from each of the three major credit reporting bureaus once per year. A good place to start is Annual Credit Report http://www.annualcreditreport.com. While you will get a free report, you won’t get a report with your credit score on it for free. For that, you will have to use a paid service like Experian, which provides a score from all three bureaus for a small fee.
It’s super important at least once every year to grab a report with your score so you can have an accurate reflection of where your credit stands. There’s been a big push for credit card companies to show you your credit score on your recent credit card statements, which will save you time and money. Since many of us auto-pay our credit cards and never look at our actual statement, go into the online dashboard for your card and review your most recent statement to see your credit score. With that said, you will still want to make sure you check out the full report to double check that your information is accurate. You should also check whether the score is your true FICO score or an approximation, because some credit cards use alternate scoring systems to estimate your number.
Credit reports will show all sorts of information and can be difficult to decipher. Here’s a great resource that shows you how to read a credit report.
2. Dispute it
Once you’ve got your report, you’ll want to check and make sure all your information is correct. To do this, scrub through your report with a fine-tooth comb and highlight any inaccuracies, such as accounts that don’t belong to you, inaccurate balance amounts, any late payments and such that you don’t believe are accurate.
You certainly don't need to pay a credit repair service to dispute inaccuracies on your credit report. There are tons of resources online that can provide you with enough information to handle this process yourself.
If you plan to make a dispute, you will want to do it the old fashioned way: via snail mail. Here's how you file a dispute and a sample letter that you can customize for your individual situation. Always make sure you save copies of the letters you send as proof that you mailed them, and it’s a good idea to send the letters certified.
If you were a victim of credit fraud, it’s very likely that there are inaccuracies on your report that are to blame for a lower credit score. Depending on the creditor, the dispute process can take quite a while, but it's worth a fight since this is, after all, a crucial 3-digit number.
3. Raise it
So what makes up your credit score? It’s a crazy mathematical algorithm that is comprised of five main factors.
- Payment History (35%) - The most important component of your credit score looks at whether you can be trusted to repay money that is lent to you.
- Amounts Owed (30%) - The second-most important component of your credit score is how much you owe.
- Length of Credit History (15%) - The third-most important component is how long you’ve had a credit history.
- New Credit (10%) - The fourth-most important component is recent credit inquires for new lines of credit.
- Types of Credit In Use (10%) - The fifth-most important component is the mix of credit that you have–credit cards, loans, installment debt and retail loans.
With that said, there are a couple of key things to keep in mind if you want to raise your credit score. It's critical that you always pay your bills on time because even one 30-day late payment will lower your credit score. You also want to make sure you don't close out an account after you've paid it off. Closing out an account will affect the second-most important component, since a large piece of your credit score is comprised of the amount you owe vs. amount of available credit. When you shrink that ratio, your credit score shrinks as well. One quick way to raise your score is to ask for a credit increase on your cards, which will widen that ratio.
Coming up with a strong payoff plan that you can commit to will be another recipe for success. As a result, you should always pay more than the minimum payments on your credit cards and throw any extra funds onto the credit card with the highest interest rate until that one is paid off, and then move to the second highest and so on.
Your credit score doesn’t have to be this crazy mystery that many want you to believe. Once you have your current report in your hands you can go to work and come up with a solid, and fairly easy, plan to raise your score. Even if you are happy with your score, there’s no harm in putting in a little extra effort to get your credit score as high as possible. No one has ever complained about paying less in interest over their lifetime.
Photo: Creative Tools