When talking about finances, we need to first get that credit together. Before I start, I will have to give a disclaimer that I am not an credit or tax expert, but I am going to tell you how I got my credit in a good spot. In June 2013, my credit score was around a 480, and I wanted to work on my credit in order to buy a house. I researched what I needed in order to get a house and saw that I needed to get my credit score to at least a 620 to get approved for a mortgage. I will explain how I got my credit score from a 480 to a 656 in fifteen months.
CREDIT SCORES & REPORT
First, I needed to know what was affecting my credit, so I needed to get my credit report. I signed up on websites that pulled info from the different credit bureaus. There are three credit bureaus (TransUnion, Experian, and Equifax) and companies don’t report everything to all three, so it bests to pull all 3.
I signed up to three credit monitoring sites; Credit Karma (CK), Credit Sesame (CS), and now defunct Quizzle. I believe back then CK used info from Equifax while CS and Quizzle used info from TransUnion. Now CK uses both. NOTE: These companies only provide something called a VantageScore and not a FICO score (the score lenders use). NOTE: These VantageScores are usually on average 20-30 points higher than actual FICO scores in my opinion. I used these three sites to compare the scores to give me an idea of what my credit score may be. I then pulled my credit report. You can retrieve your free credit report once a year at AnnualCreditReport.com.
DISPUTING INACCURACIES
What to do with that credit report? Go over it with a fine-toothed comb. Check every little detail on that report. I checked my credit report for any inaccurate information or debts that may not be mine. When I did find inaccuracies, I went directly to the credit bureaus’ website and disputed the debt.
People are going to hate me for this, but this is what those credit repair companies do. Save your money and dispute them yourself. When you dispute a debt, the credit bureau contacts the company that claims you have a debt with them. That company has to prove to them that the debt is yours or that the information is correct. They also have only 30 days (sometimes, 45 days) to respond and provide that information, and if they don’t, then the debt is removed from your credit report. NOTE: You will have to dispute the inaccurate item(s) on each credit bureau’s site that the item appears on. For example, if the debt is showing on the TransUnion and Experian credit reports, then you will have to go to both of the credit bureaus’ websites and dispute the inaccuracies there.
DEROGATORY MARKS/ DEBT-TO-INCOME RATIO
Now is the time to start paying down the rest of your debts, especially those that were sent to collections, resolved in court (judgment), or charged off. I looked through my debts on the credit monitoring sites or on my credit reports. I looked at the delinquent dates on the debts and I began paying my debts off. Then I started paying the newest debts first because they had the most impact on my credit score. The older the debt, the less damage it can do to your credit. New debt hurts your credit more, so paying these off helps your credit more.
Charge-offs, judgments, and collections are considered derogatory marks on your credit. FYI: Derogatory marks have a huge impact on your credit score. They are removed from your credit report in 7 years. A judgement may take up to 10 years to fall off your credit report depending on your state. So the closer the debt is to falling off, the less attention I would give it. I would advise letting those fall off. Making payments on an old debt reactivates it in a sense and makes the debt seem new due to the new activity on the account.
The goal of paying debts off is to lower your debt to income ratio (DBI). FYI: DBI doesn’t have an impact on your credit score, but it does influence if a lender sees if you are high risk or not. You shouldn’t owe substantially more than you make. Lenders believe that people are high risk if they have high DBIs, meaning that they are more likely to not repay a loan or not pay on time. You want to owe as less as possible while keeping your accounts active, which brings me to our next topic.
AGE OF ACCOUNT HISTORY
I didn’t have any issues in this area, but I will discuss this anyway because this is important as well. I would advise not closing any accounts. A lot of people don’t know that closing an old account actually hurts your credit score and not helps it. This is because it changes the age of your account history. For example, you have 3 accounts: a 14 year old account, a 3 year old credit card, and a year old credit card. You decided to close the oldest account. So now you have a 2 year account history instead of the 6 year account history you had before. You want your average account history to be as high as possible. FYI: This has a medium impact on your credit score.
A high average age of account history lets creditors know that you are not a high risk debtor. Also, having a high number of open accounts is a good thing. Having numerous accounts let lenders know that you are able to handle your credit responsibly. FYI: The number of accounts you have has a low impact on your credit score, but every little bit counts. Closing accounts may hurt your age of account history as well as your credit card utilization, which we will discuss next.
CREDIT CARD UTILIZATION
So, my next step was paying down my credit cards to get my credit card utilization (CCU) low. CCU is the percentage of available credit that you are using. For example, if you have a credit card that has a $1,000 spending limit, you shouldn’t carry a balance over $300. Having a less than 30% credit card utilization is one of the keys to having great credit. I paid my credit card debt down until I had a 20% CCU. FYI: CCU has a huge impact on your credit score.
PAYMENT HISTORY
Another factor that has a huge impact on credit scores is payment history. I made sure I began to pay everything on time from then on. NOTE: Late payments are not reported unless they are at least 30 days delinquent. This should be one of the easiest ways to improve your credit score.
CREDIT INQUIRIES
Credit applications (credit inquiries or hard pulls) hurt your credit as well, and they stay on your credit report for 2 years. Hard inquiries only drop your score a couple of points, but all points can help. Also, the impact of these inquiries fade very quickly. Make sure not to have any inquiries on your credit when trying to apply for large loans, such as cars and mortgages. I made sure that no one pulled my credit until I was ready to get pre-approved for my mortgage.
And, that’s it. That’s what I did to get my credit score to jump over 170 points in a little over year. I hope all of this information and these tips help you improve and fix your credit score. Leave a comment and let me know. Talk to you later, ladybugs!
