Do you know what makes up your credit score?
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Do you have a low credit score? If so, you’re not alone. Thousands of Americans, buffeted by the recession, are facing lower than average FICO scores. Since most Americans have, on average, a credit history of 14 years and 13 credit obligations, the capacity for error can be great. In fact, since the average American has approximately $19,000 in credit to manage, it helps to know how you can avoid getting lower credit scores, or how to improve your existing one.
In this article, we discuss how bad credit happens and what steps you can take to repair your low credit score.
How Bad Credit Happens
More than 25% of Americans have credit scores below 600, which is commonly referred to as the dividing line between good credit and bad credit. How do they get into this predicament?
There are four steps most consumers take on the road to poor credit:
- Overuse of credit – the higher your balance, especially relative to your credit limit, the lower your credit score will be.
- Late payments – a single late payment (over 30 days late), can dock your credit score by as much as 110 points.
- Debt management tactics – short sales, deeds in lieu of foreclosure, settlements, and other debt reduction practices can decrease your credit score by as much as 85 to 160 points. Bankruptcy can drop your score another 130 to 245 points.
- Actions by the credit card issuer – your credit scores will fall if your lender cuts your credit limit or pursues any collection activity.
Understanding Credit Management
It’s important to know there’s a right way and a wrong way to manage credit. Less than 50% of Americans have ever been 30 days late on a payment, but 30% have been 60 or more days late, and 20% have had an account closed by the creditor. So obviously proper credit management practices should be implemented by at least half of all consumers who are using credit.
Credit utilization in the United States breaks down in this way:
- 40% of credit holders carry less than $1000 balance on their accounts;
- 48% carry approximately $5,000 or less as a balance;
- 37% carry less than $10,000 in non-mortgage related debt;
- 15% carry more than $10,000 in debt.
Repairing Credit – What You Should Know
You can repair your credit score by taking the following actions:
- Pay all your credit card and other bills every month;
- Begin paying down your high credit card balances;
- Exhaust all other avenues before allowing foreclosure to happen or declaring bankruptcy.
Repeatedly requesting your credit report can lower your score. Be sure to challenge any false or incorrect information on your credit history, which you can obtain by getting your free credit report on an annual basis. The total amount of credit you have isn’t really what counts; instead, lenders look at your available credit when calculating your score. If you want to repair your credit, a debit card won’t help your score, but it can help to rein in your spending habits.
You pay your apartment rent on time every month. You never miss a utility bill. Your credit score, then, must be strong, right? Maybe not. The only way to know for sure is to check your annual free credit report.
Your three-digit credit score is one important number. Lenders of all types, whether they’re passing out a mortgage, auto, or personal loans, rely on it to determine if you qualify for their money and at what interest rates. A growing number of employers study your credit score when you apply for a job. Your auto insurer might use your three-digit score to help set your policy rate.
In other words, being stuck with a bad credit score – one under 700 on the popular FICO credit-scoring scale – can make life difficult.
Most troubling of all is that you might pay your bills religiously each month and still have a weak credit score. The problem? You might not be paying the right bills.
Credit reports don’t take into account how well you make such payments as apartment rents and utility bills. That’s because these creditors don’t report their findings to the bureau. This means even if you’ve never missed a rent or electric bill in 10 years, you might still have a low credit score if you don’t have enough other credit. The credit bureaus penalize consumers not only for missing payments and filing for bankruptcy protection but for not having enough credit, too.
That’s why it’s so important for you to view your free annual credit report each year. Your credit report will show you exactly what lenders see when they look at your credit history. It won’t show you your actual three-digit credit score – you’ll have to pay one of the three credit bureaus, Experian, Equifax or TransUnion, for that – but it will give you an idea of what your past financial history looks like.
The good news is you can get your credit report for free. By visiting the Web site AnnualCreditReport.com, you can order one copy each of your three credit reports – one maintained by each national credit bureau – every 12 months.
Just make sure you request these reports only from AnnualCreditReport.com. The other commercial sites promising you free credit reports are not to be trusted. Many of them require you to first sign up for a free trial of their credit-monitoring services. Then, if you don’t cancel this service after the free-trial period ends, you’ll find a monthly fee on your credit card. AnnualCreditReport.com, though, provides you with your credit reports free of charge.
Explore your free annual credit report to get the real truth about your credit history. You might be surprised at what you find.
If you spend any time on the Internet, you have surely seen the many ads offering free credit scores. It sounds like a good deal, except credit scores are never really free. You will pay one way or the other. To get your rating from one of these companies, you will have to sign up for one of their services, usually a credit monitoring service. That is not necessarily a bad idea. It can help protect you from identity theft, and alert you to credit checks by businesses that want to offer you a pre-approved credit card or loan. But, it’s never really free.
If you do not want to join those programs, you can pay for your score on the FICO website. The only time you can get free credit scores, and the reason why you do not want them, is when a lender denies you credit. A new law going into effect in mid-2011 requires lenders to send the applicant their credit score when they deny their credit due to a low rating. This is a good thing for consumers put in that unfortunate position, as it will eliminate all of the mystery surrounding a consumer’s credit rating.
Don’t confuse free credit scores with free credit reports. You can get a free report once per year from all three reporting agencies. You can also get a free credit report anytime someone denies you credit. Just contact the reporting agency, and they will mail you one. The report doesn’t show you your credit score, but it does give you a lot of good information about your credit history.
Your best bet is to maintain the finest credit history you can. If you have a great rating, you will be approved for most loans. If that happens, you won’t get free credit scores. That is a good thing. If you must know your rating, you can go ahead and pay to get it.
It normally costs money to see your credit score, but here’s how you can get it for free.
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