This blog post is excerpted and adapted from one of the free Delta Community Financial Education Center live workshops, Ways to Improve Credit, which is being presented this month and is available to both Credit Union members and the general public. Please visit the Financial Education Center's Events & Seminars page to register for its monthly, no-cost webinars with practical, actionable advice on managing personal finances, including saving and spending suggestions. The work of the Financial Education Center reflects Delta Community’s mission to help both its members and others in the community achieve financial success.
Please consider that the Financial Education Center workshop related to this post dives much deeper into this subject, and we recommend that anyone interested in personal credit consider attending a Financial Education Center presentation.
Benefits of improving your credit score
Simply continuing to polish your credit can make life easier, giving you a better chance of qualifying for the best interest and payment terms on loans or credit cards. If you’re struggling with a low credit score, you’re better positioned to quickly make gains than someone with a strong credit history. The lower a person’s score, the more likely they are to achieve a larger increase if they actively manage it carefully. There is much more upside to having a higher score, and even small changes in behavior can result in greater score increases. If you’re starting from a higher score, you likely don’t need to get a jump of a full 100 points to make a big difference in the credit products you can get.
A good financial credit score helps with your insurance credit score. An insurance score, also known as an insurance credit score, is a rating computed and used by insurance companies that represents the probability of an individual filing an insurance claim while under coverage. The score is based on the individual's credit rating and will affect the premiums they pay for the coverage.
Why it’s important to check your credit report and your credit score
Before focusing on actions to improve your credit score, it helps to know what might be working in your favor (or against you) for your current score—so check your credit report. That’s where checking your credit history comes in. Pull a copy of your credit report from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. A credit report has detailed information about your credit activity and current credit situation, such as loan paying history and the status of your credit card accounts. You can get a copy of a credit report free once a year through the official AnnualCreditReport.com website. Then review each report to see what’s helping or hurting your score. Look over all of your charges and transactions to make sure everything is current and being paid on time, check that you don’t have any balances that are too high compared to the limits, review the different types of credit you have, and determine approximately how old your credit report is.
It could also help to see what your actual credit score is, and you can also check that online. However, be aware that you may have to pay to see your actual credit scores either through the three credit bureaus or via myfico.com. A credit score predicts how likely you are to pay back a loan on time. A mathematical scoring model uses information from your credit report to create a credit score, and the higher the score, the better your credit. When you get your scores, you will also get information about which factors are affecting your scores the most. Reason codes (or risk factors) accompany your credit score and will tell you any reasons why your score is not a perfect 850 (if it’s not 850, there must be some combination of factors holding it back). Each credit scoring model can list your reason codes, but the closer your score is to 850, the less important they are. They show you which specific influences are lowering your scores and can help you focus your efforts on improving them.
Actions to improve your credit score
No strategy to improve your credit will be effective if you pay late, since payment history is the single biggest factor that affects credit scores, and late payments can stay on your credit report for seven years. When lenders review your credit report and request a credit score for you, they're very interested in how reliably you pay your bills. That's because past payment performance is usually considered a good predictor of future performance. You can positively influence this credit scoring factor by paying all your bills on time as agreed every month, and it is much better to have paid-off debts, such as your old student loans, remain on your record.
It’s very important to at least cover the minimum payment for each bill or debt. If it is not paid in full by the due date, the remaining due can be reported to the bureaus as late.
If you're behind on any payments, bring them current as soon as possible. Once a payment is reported as late, it’s very damaging to your score. Older late payments have less effect than more recent ones.
If you miss a payment by 30 days or more, call the creditor immediately. Arrange to pay up if you can, and ask if the creditor will consider no longer reporting the missed payment to the credit bureaus. Even if the creditor won’t do that, it’s worth getting current on the account as quickly as you can. Every month an account is marked delinquent hurts your score. While late or missed payments appear as negative information on your credit report for seven years, their impact on your credit score does fade over time. Showing lots of positive credit behaviors after a misstep can help offset the damage more quickly and eventually improve your credit.
You also don’t want to be late on paying your rent, utilities, cellphone and internet services. Generally, rent and utilities do not appear on a credit report unless they’re delinquent and referred to a collection agency. Landlords could report late rent payments, so you still don’t want to be late. However, there are more options becoming available to report positive rent and utility payments.
Pay down balances on debts, such as loans or credit cards. Keeping your balances low or reducing the amount you owe, especially on credit cards, is another major factor in calculating your credit score. Credit utilization (amounts owed) is the second biggest factor behind payment history. The simplest way to keep your credit utilization in check is to pay your credit card balances in full each month. If you can’t always do that, a good rule of thumb is keeping your total balance at 30% or less of your total credit limit. From there you can work on whittling that down to 10% or less, which is considered ideal for improving your credit score.
Manage your credit cards wisely. Managing credit cards well can have a big impact on your credit score. One thing to keep in mind is you don't need to carry a monthly credit card balance to build your credit history. You can pay off your credit card bills every month and positively affect your credit standing. The card issuer will still report the activity to the bureaus and you avoid paying interest on the balance.
- Be aware that closing credit cards can potentially have a negative impact on a credit score. Closing a credit card means you lose that card’s credit limit when your overall credit utilization is calculated by a credit bureau, which can lead to a lower score. One option is to keep the card open and use it occasionally so the issuer won’t close it.
- Also, with credit cards, older cards are better than newer cards. The average age of your credit cards also affects your score. The impact is not nearly as large as credit utilization, but the age of your account does matter. A card you’ve had for a long time helps your credit as long as you keep it open.
It is possible to rebuild and maintain a good credit score
If you’ve encountered financial challenges, take solace in the fact that your credit score is not set in stone. By implementing some of the strategies mentioned here, you can get back to a favorable score. The good news is, all negative information will eventually cycle off your credit report, and the more time that has passed from the negative occurrence, then the less it affects your score. Until it does drop off, focus on the things you can positively influence, like paying all your bills on time and reducing balances.
Interested in more personal financial advice?
Delta Community has some more timely financial advice worth checking:
Good financial health starts with good BALANCE
BALANCE is a financial education and counseling organization that offers free services to Delta Community members. Some of its services include credit report reviews, debt management, and information on budgeting, money management and home buying.
Visit the BALANCE website to learn about their education and assistance programs. Members can also speak with certified credit and housing counselors to get personalized guidance. Note that the services offered through BALANCE are separate and distinct from any business conducted with Delta Community and are not guaranteed by, nor are they obligations of, the Credit Union.
