Spring into Good Credit
W hen spring comes around, we find ourselves coming out of hibernation and fixing up things around the house. The term spring cleaning “has been” given to this annual exercise of cleaning up our homes, which many times means decluttering and cleaning our closets. I advise my clients that this is also a great time to clean up our credit reports and scores. According to FinancialMaintence.com, 54% of Americans have never checked their credit score. Yet, your credit score is one of the most impactful scores you will be given in your life! In the U.S., the average credit score ranges from 650 to 750, with anything over 810 being considered perfect. Credit scores can affect everything from your employment to your ability to purchase your home and it’s important that you understand it and take care of keeping it in good standing.
What came first, the chicken or the egg?
While many of us have heard of a credit score, most people don’t understand how that score came to be and that there exists a complete record of every credit account you have every opened. Credit reports are the basis for how your credit score is determined. These reports contain an account by account retelling of every credit-based account you have ever had, from mortgages to major cards to cell phone bills. Each of these companies report everything about your payment history to 3 agencies (Equifax, Experian and TransUnion) who create these reports and assign you a score based on the findings in those reports. It is imperative that you review these reports and your score yearly. You can also look at it under certain situations. For example, if you are making a major purchase, are applying for a job that requires a positive score or you feel that you have been the victim of identity theft.
Keeping it all Good
There are certain keys to establishing and keeping a credit score in good standing. Keep in mind that your score is just a predictor of your ability to pay and if you are a good credit risk.
- Pay on time and try to pay in full – it in imperative that you at least pay the minimum amount required monthly from your creditors. When you are able, you should pay the amount in full and bring the account balance to zero.
- A wallet full of plastic really doesn’t look good. – Credit agency see a person with many open credit accounts as possibly being over extended and a bad risk. This is especially true if there are outstanding balances that linger on your accounts.
- Lastly, when applying for credit, it hurts you to apply to multiple creditors at the same time. Each creditor will request your score and that will lower your score a little bit. Think about it. If you’re going all around town asking for money, it will come across as being slightly desperate.
Now, Let’s Get to Cleaning
Now that you understand the basics of credit scores and how to keep it in good standing, lets cover what you should do if your score should fall below a positive threshold. First, there is no shame in having one’s score drop. There are many circumstances like illness, death or unemployment that can affect your ability to pay in a timely manner. Remember that this is the time to reach out to your creditors and work out some sort of payment plan that will benefit everyone. Many companies are willing to work with you. Remember, their ultimate goal is to get paid. In the event that your score is lowered, pull your credit report and read it line by line. 26% of consumers report finding errors on their reports. If you find errors in your report, contact the reporting agency and dispute the claim immediately. These negative items will appear on your report for at least 7 years so their impact will be with you for a while. Lastly, the most immediate thing that you can do for a bad report and score is to pay all your outstanding balances in full.
This month, after you put in the new spring flowers and clean out your closet, sit down with a glass of wine and take a look at your credit score and report. There are various website that will do this for you for a small fee. In addition, some of your banks will offer this service as part of your account fee. Remember, there is power in knowing where you stand and fixing any problems that you may face.