Handling your credit will help to build good scores. But, I want to find out how to optimize my credit score.
The DO NOTs:
- You can’t raise your scores if your finances are still in free fall. If you’re unable to pay your bills, you certainly can’t fix your credit. Real credit score repair will have to wait until your financial crisis has been solved and you have enough money to cover your expenses, plus some extra to begin paying down your debts.
- You can’t raise your scores if you don’t use credit. Credit scores try to predict how well you’re likely to use credit in the future by how well you’ve used it in the past. So while living a cash-only lifestyle may do wonders for your wallet, it won’t boost your scores — in fact, without continuing use of some type of credit, eventually your credit reports won’t even generate credit scores.
- You don’t have to pay credit card interest to achieve great scores. “Using credit” is not the same as “carrying a balance on your credit cards.” Carrying a balance is expensive, bad for your finances and completely unnecessary. Many of us who have achieved 800-plus scores pay off our balances religiously, and we know you can build and keep great credit scores without ever paying a dime of credit card interest.
- You can’t expect overnight results. You’re likely to see improvement in your scores within 30 days if you pay down significant chunks of your credit card debt. But otherwise, credit repair takes time, and how much time depends on the many details of your credit reports. If you have serious black marks, such as bankruptcies or foreclosures, you can see significant improvement in your scores as time passes but you may have to wait until those negatives drop off your credit reports before you can join the 700-Plus Club.
Now that we understand those credit basics, let us get to the DOs of raising a credit score (over 740?):
- Patrol your credit reports. Your credit scores are based entirely on the information in your credit reports on file at the big three credit bureaus: Equifax, Experian and TransUnion. If the information is wrong, your credit scores could suffer. You can get your reports once a year for free from the government-run AnnualCreditReport.com.
Dispute any serious errors, such as:
Accounts that aren’t yours.
Reports of late payments when you paid on time.
Bankruptcies older than 10 years or accounts that were wiped out in bankruptcy but are listed as still due.
Other negative information that’s older than seven years (the seven-year clock typically starts 180 days after the account first went delinquent).
- Get a major credit card. Retail cards and gas cards can help you build your credit history initially, but to get your scores into 700-plus territory you’ll want at least one big kahuna: Visa, MasterCard, Discover or American Express. If you can’t qualify for a regular card, consider a secured version, for which you make a deposit with an issuing bank. Just make sure the card reports to all three bureaus and that it converts to a regular credit card after 12 to 18 months of on-time payments.
- Arrange automatic payments for every card or loan. Credit scores are extraordinarily sensitive to whether you pay your bills on time, so don’t let travel, a busy schedule or a simple brain fart trash your scores. Most lenders will let you set up automatic payments that take an amount you specify — the minimum payment, a set dollar amount or the full balance — every month from your checking account.
- You need to have great credit to take advantage of today’s lower interest rates. Don’t let disputes go to collections. Yes, your insurance should have covered that bill; no, you shouldn’t have to pay for a broadband connection that doesn’t work. But if you let a commonplace problem like these escalate, your account will be turned over to collections and become a big black mark on your credit reports. Pay under protest and get your revenge in small claims court. (Don’t get sued yourself, though: Lawsuits and judgments are another major stain on your credit reports.)
Give your limits a wide berth
- Spread out your debt. More than a third of your FICO score depends on how much of your available credit you’re using — your so-called credit utilization. The FICO formula likes to see big gaps between your balances (whether you pay them off each month or not) and your limits, especially on credit cards. (You’re rewarded for paying down installment debt, such as mortgages and auto loans, but your scores improve much more dramatically when you pay down revolving debt such as credit cards.) In short, it’s better to have small balances on several cards than a big balance on one card.
- A balance is a balance. You have to worry about your credit utilization ratio even if you pay your balances in full each month. The balance that’s reported to the credit bureaus is typically the one on your last statement, not the balance that’s left over after you pay your bill. So if you charge $9,000 on a $10,000 card, it’s going to look like you’re using 90% of your limit (which is really, really bad), even though you paid off the balance in full when you got the bill.
- Shoot for 10%. The less of your available credit you use, the more FICO rewards you. Keeping your credit utilization below 30% on your cards is good; getting it below 10% is even better. If you regularly use more, ask for a higher limit, spread your charges out on more than one card or make two payments every month — one just before your monthly statement closing date to lower the balance reported to the credit bureaus and a second one just before the due date to avoid late fees.
Q: So, why did I bring up optimizing your credit score when I am laddened with debt?
A: Because I am curious if I should pay down a CC to less than 30% of the balance (even with the future intentions of PIFing the card), then start snowballing the next card to less than 30%. Rinse, lather, repeat.
Its important to me (since starting my PF journey) to have a solid credit score. In case opportunity comes knocking, I want to have the valuable stuff available to me. In case there is a financial emergency, I need to know I can go to my bank and be okay.
What’s your thoughts on all of this? Do you follow these guidelines? Or which ones are you still trying to reach?