Everyone has a common goal in their financial journey. This goal is sought out diligently because it determines if you have access to credit, how much you can borrow, and what interest rate you will be paying. The path to improving your credit score isn't a sprint. This path is a marathon that takes time to achieve and to successfully reach.
Anyone can improve their credit score but before taking actions, below we will dive into several areas of what determines your credit score because knowledge is key to reaching a 765, 812, or whatever number you are trying to achieve.
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It is effortless to put faith into a system we heavily rely on for financial matters and primarily when millions rely on a system to where nearly all financial institutions use it to determine if one is creditworthy. I am referring to a credit report; however, it is your responsibility to verify the accuracy of your story.
In 2012 the Federal Trade Commission (FTC) issued a study per Congressional mandate requiring the FTC to examine consumer errors within the three leading credit reporting agencies. In 2015 a follow-up study was performed, and as to many surprised consumers, nearly 20% of these consumers had identified errors.
It highlights the importance to review and check for accuracy regularly. Another factor to consider as another reason to verify its accuracy is Identity Theft. I've written an article found in DollarOtter.com, A Victim of Identity Theft stating according to BigCommerce, "96% of Americans with internet access have made an online purchase at some point in their lives, and four in five (80%) have done so in the last month alone.
It used to be that such companies offered their products solely on their website; however, with the clear majority of online shoppers hitting up Social Media, retailers are flocking to social sites to advertise their brands. While simplicity may be convenient, out in the shadows of the tech world lurches a hungry thief waiting for an unsecured network to hack a shopper's credit card information quickly. In 2016, Bankrate.com reported that 41 million U.S. adults were such victims. Due to this alarming number making up approximately 13% of the U.S. population, the Federal Trade Commission established a site, IdentityTheft.gov.
Don’t be a victim of Identity Theft. Protect your sensitive personal information and check it for any irregularities, errors, and check for accuracy.
Report missing or dispute accounts
Should you find any errors or items needing to be corrected, you must contact the company or institution first to address the matter. If approached by mail, then ensure you send via certified mail with return receipt. If the issue has been corrected but still reflecting negatively on your credit report, then contact the credit reporting agencies. Be sure to keep and maintain copies of any disputes and records of such frivolous activity.
According to the FTC, both the company and person are responsible for correcting the information. Follow the steps outlined in the link to take action further:
FICO is a brand name derived from the company Fair Isaac Corporation, or FICO was introduced in 1989 that would forever change the landscape for consumers alike. Credit risk scoring itself was created in 1960 to assess credit for lenders.
Today, financial institutions rely heavily on a borrower’s FICO score to determine several factors: how likely this person is to repay a loan, what type of character is this person, and how is this person's consumer behavior. "FICO scores are highly predictive measures of applicant and customer risk. Credit grantors can better determine, for example, which consumers to target, how much credit to extend, and whether to raise a credit line."
FICO scores can vary on a scale typically from 300 to 850 but some credit reporting agencies, such as Experian, generate what is known as the PLUS Score. The score ranges from 330 to 830. To have a credit score, one needs to have at least one account opened for at least six months or more to include being reported to a credit reporting agency. This is why most 18-year-old teenagers do not have any credit and need to work towards a score.
Note: Credit Sesame is currently offering a Free Score so see how you credit score stacks among others.
When interpreting a FICO score, the lower the number, the less reliable you are perceived to be from creditors or lenders. The higher the score, the more trustworthy and dependable. Sorry, but that is just the way it is. Some industries will interpret low scores as "You will pay your bills late" while the higher the score is perceived to be "You'll pay your bills on time."
Lenders rely on credit scores to determine the rate of interest to charge. The lower the score, the higher the price. This is because a lower score equates to more risk. More risk = higher return to the lender. Lower risk = lower performance. There are a variety of dozens that banks may choose from so when a consumer is informed of his or her score, sometimes they are shocked because it is appearing to be lower than what the AnnualCreditReport.com provided them. This is because the scales can be weighed slightly.
Note: You are allowed one free credit report annually from AnnualCreditReport.com
Most of the scoring methods are somewhat identical and consider the same essential criteria. Above is an example chart from FICO that determines how to increase your score. We will dive into each of these throughout the chapters as it is the formula designed to boost your score.
Is your score higher or lower than you anticipated? The goal is obviously to get as high as score as possible. This may prove to be an easy task, but it is challenging if you don’t know what measure makes up the score. If you have a score, for example, of 655, then you know that according to the pie chart above produced by FICO, 65% of your score is determined by 1. Payment History 2. Credit Utilization. Therefore, focusing on these two measures alone will assist in raising your credit score. The other steps are just as equally necessary, but let the numbers do the work for you.
When it comes to paying bills, the traditional manner used to be breaking out the checkbook, calculator, and bank statements. Then adding and subtracting what debits and credits up to and then decide how to pay your bills. The debtor would either go to the bank for payment or write a check and then mail it out to the company requesting a refund. These payments could take anywhere from 2-14 days to process.
Today with the massive upgrade in technology, anyone can make a payment in seconds and with this technology, how is it that consumers are still bouncing checks? Overdraft fees collected by banks in 2016 totaled over $30 billion. 6 Not thousands, not millions, but BILLIONS! That's insane and reflects that people are not managing their money appropriately and while banks seem to act as they hate it, it's free money to these financial institutions. While autopay can help to alleviate such overdrafts, there are pros and cons to this topic.
A very well known benefit autopay is the avoidance of late payments. When using autopay for your bills, making online payments will decrease the amount of missed payments while ensuring payments are made on time. Just think about the cost of an overdraft charge or missed payment. It pushes your bank account even further into the red as financial services will charge an amount referred to as Overdraft Charges and these can range from $20-$40. A missed payment could be reflected on your credit score depending when the next payment is made.
Avoids Late Fees
When making auto payments, you avoid receiving late charges that companies love to tack on. These fees, similar to overdraft charges, can range from $20-$50 in some cases. Also, at risk, your interest rate. Some companies will increase your rates for missed payments to receive their missed interest payment.
Avoid Postage Expense
How inconvenient is it today to have to run over to the Post Office only to find two people working the counter and a line of 12 people waiting. This trip has taken me anywhere from 20 minutes to almost an hour because of the inconsistency of the service or difficulty degree from the customers. Also, paying online with autopay, you can save the expense of a stamp, to include possibly, fuel expense from driving to the Post Office.
Goodbye Check Writing
Since autopay utilizes, EFT, or electronic funds transfer, writing checks are almost nonexistent. With the millennial generation grew up with the power of technology in their hands, the bulk of this young population have failed ever to write or see a check. However, they are very familiar with the plastic card-debit or credit card and even online play.
Another pro to using autopay is saving time. It’s the sole reason why this tool exists. Fast is better right? Not always, but you see the big picture. Its faster in so many aspects from check writing, calculating, driving to bank or post office, etc. Pay it online, and you’re done.
Cons of Autopay
With every benefit comes a weakness or risk. For autopay, it can have negative impacts. I have listed several of these below for you
Lose Oversight of Your Bills
It has become a regular staple to pay bills on payday immediately. We post and we forget about it. The reason why banks generated over $30 billion in 2016 from overdraft charges is that we neglect to sit down and review our bills. We are offered "paperless billing," which is a great concept, as long as, you still spend the time to manage your bills.
To go along with neglecting bills, just directly paying the bill online, you miss out on an opportunity to see if false charges were billed to you. If these charges were billed and you still paid it, then you gave away free money. This is another concept that people miss out on when it comes to their credit report.
By not looking closely, they may perhaps not see charges that they could have gotten removed which would help reduce their debt faster, which increases their credit utilization, i.e., Higher Score.
Nothing is more satisfying than to see the bills go away and your credit score rocket up. If you aren’t managing your bills correctly, then you could potentially be tossing away your money.
Reduce Debt Utilization
Also known as Credit Utilization, one of the most common and best ways for any consumer to raise his or her credit score is through paying down debt. Regarding credit cards, the utilization rate is how often and how much money is being generated onto the card.
When the card is charged, for example, on an item for $500 with a credit limit of $1,000, that utilization has increased from 0% to 50%. The higher the number, the riskier one may be.
This credit use ratio can make up to 30 percent of one’s score, regardless, of whether you plan to pay this off or not. Being that this utilization figure makes up more than a quarter of your score determination, focusing on this tool would be vital. Knowing the various weights of the credit score, FICO is crucial to improving your score.
Types of Credit
With FICO considering your score based on a blended mix of debt, a variety would entail credit cards, retail accounts, installment loans, financial services accounts, and mortgage loans. While you may not need each one, having a blended mix and reflecting subject on-time payments are crucial and the key to having a better credit score.
When I was establishing my credit score, I could never get my score any higher than 702. I struggled with this score for years trying to break that ceiling that was keeping me from reaching the high 700s or low 800s. As I began to understand the credit mix, I realized that a mortgage balance was missing.
A few years later, I bought a lovely home, and within the following month, my score jumped to 780. I couldn't believe that more debt added raised my score but what this reflected is financial institutions found me reliable for such a large loan amount; however, this is not to recommend you go out and immediately purchase a home. It also reflects your experience with the revolving and installment debt.
According to myFICO, “Credit mix determines 10% of a FICO score.” You must also remember not to close any accounts if possible. Closing credit accounts will not disappear on your credit report but rather reflect "CLOSED" or something along with this repetition.
I bring this up because you if currently have credit card bills past due, credit card companies have the option to close the account without your approval. This will lower your score, and you must still pay the balance. For many companies, once the account is closed and again reflects a balance, these accounts cannot be reopened.
With the rapid pace of consumer advertising and marketing for credits, we are offered low rates on credit cards, mortgages, and auto loans every time we turn on the TV, check email or driving on a highway only to see billboards. It's so frequent and accessible; it's easy to forget the potential impacts on your credit rating. Of course, it always feels rewarding to be approved.
It is not uncommon to see consumers' credit FICO score drop temporarily when one has been approved for new credit. If you paid attention to the pie chart in Chapter 1, we mentioned "inquiries." Having recent inquiries up to the last two year on your credit report may potentially decline your score. Therefore, avoid opening too many lines of credit or applying for new cards and applications.
Start by becoming debt free. Every summer, as a child, my family would take a road trip. Typically, these road trips were to see family members; however, these were road trips, nevertheless. Back then, the electronic GPS or phone GPS was non-existent to ordinary folks.
We used the ancient Rand McNally maps that were as wide as the van sometimes, and I used to love just staring at the charts examining the different vast city names and distances in between. The point is that while we have traveled the route many times, a map was necessary.
Today, when going, we have a habit of setting the GPS in our phones. We are starting traveling with full confidence in this little piece of technology. We do this because it is highly efficient and reliable. Without this high technology, we could probably still manage to figure out a way to arrive at our destination, but it wouldn't be as effective without it. We would waste time, gas, and money.
Financial GPS is highly recommended to families by financial planners because we want families to be efficient in saving money and time.
If you still haven't made one, here is how you can easily make an active plan or Financial Roadmap.
Know your debts: The first step towards making the plan is to identify your debt situation to be debt free soon. Carefully go through all your credit card statements, loan, and other statements. Calculate the amount you owe on various cards or loans etc. and identify the exact amount you have to repay.
Sometimes you may even be shocked by the enormity of the amount you have to repay. However, the idea is to know how much exactly you owe so that you can make arrangements accordingly and be debt free. Also, you will need to observe the interest rate being pushed on your debts. On www.DollarOtter.com, we have blogged about compounding interest and the Rule of 72. Take a look at the article in the link above.
Prioritize: Once you have come to know the exact amount you have to pay back, you need to prioritize the payments. Consider which ones you will be paid quickly and which ones later. The best thing to do if you have some debts is to choose those that have higher rates of interest and pay them back promptly. Otherwise, you will be paying more every month, including the interest, and it will be challenging to be debt free.
Another option is to select the debts you can pay off the fastest to free up some capital. In the diagram below, I have an example of the Debt Stacking Payment Plan. This plan is designed to allow your monthly payments to be consistent while taking next paid off debt payment and applying to the next debt amount. If you are consistent, you will be amazed at how quickly debt can be tackled and the amount of interest you save. Make the priority list according to your convenience.
DEBT STACKING PAYMENT PLAN
Devise a plan: After creating your priority list, it is time to devise a plan to be debt free. The payment plan should help you to pay off the priority loans quickly. So try to put all the extra money towards the payment of the loans. You can also make double payments to decrease the repayment amount. In case of the other smaller loans, you can make the minimum payments until you are ready to pay them off.
Automatic payment: To be debt free quickly, use the automatic repayment method. The best option to make timely repayment is to set up an automatic repayment from your bank account. This can save you much time and also be assured that the payments will be made on time. There is no need to fear about deferring the payments. However, ensure that your account has the amount during that time. By following these procedures, you can easily clear all your debt to be debt free.
I consider debt to be a global epidemic because nations have fallen and collapsed because of their inability to control their spending habits. At the end of the 2017 fourth quarter, the Center for Microeconomic Data (CMD) reports that "Household Debt and Credit reveals that total household debt reached a new peak in the fourth quarter of 2017, raising $193 billion to reach $13.15 trillion."1
According to a study by NerdWallet, their analysis found that the “total credit card debt continues to climb in 2017, reaching an estimated $905 billion – a nearly 8% increase from the previous year.”
The study also found that the average credit card balance is approximately $15,654. While grocery bills and medical expenses saw considerable increases in 2017 from credit card activities, it is time to recalculate our financial GPS and get started.
Protect your credit
It's important to note that repairing bad credit is a bit like losing weight: It takes time, and there is no quick way to fix a credit score. Remember, you only get one count, and this score determines your financial ability in many respects from lending to borrowing to renting. Protect it with your life and work to improve it consistently.
As the plague of debt continues to mount within U.S. households, it is imperative that we regain control. With the open credit market, it is easy to become consumed; however, you must strive to boost your credit score in order to reduce your debt and earn lower interest rates. Your access to credit will widen affording you more options. Your score is the key to lenders on how responsible you are and what character of the person you are.
Being disciplined, motivated, and focused with the tools and resources outlined in the previous chapters, you will start your path to paying off your debt, and you'll be amazed how fast your credit score improves.