We here at Tom Crimmins Realty can attest to the importance of a good credit score. When it comes to buying a home, big or small, all credit-collecting companies look at one thing before offering a loan: your credit report. This might be a breeze for some and nerve-wracking for others. Here’s a crash course on all things credit and how to break the coveted 850.
What is a Credit Score?
A credit score is a three-digit number ranging from 300-850 that expresses how likely you are to repay your debts. This number is created by the three main credit bureaus, Equifax, Experian, and TransUnion, using algorithm models created by companies like FICO. Lenders use this number to determine approval for loans, credit limits, interest rates, and other financial decisions that depend upon creditworthiness. This method allows lenders to see an objective, holistic view of you as a consumer, and give you a chance to reap the benefits of reliable credit decisions.
What makes up my Credit Score?
Credit scores are complicated and are based on many different factors including:
Number and severity of late payments
Type, number, and age of accounts
While formulating scores, Bureaus are unable to use demographics, such as race, religion, marital status or ethnicity, in their evaluations due to the Equal Credit Opportunity Act. They can, however, consider other factors including occupation, income, and type of residency.
What is Good Credit?
Credit Scores are generally divided into tiers. Here's the breakdown:
Excellent Credit: 750-850
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
How Can I Improve my Credit Score?
Improving your credit score can seem impossible. One missed payment or pricey vacation and your number can take a hit. However, with a few simple steps, you can work your way up the credit tier.
Check Your Credit Report
Just as important as the score itself is your credit report. Making sure your report is correct is essential before applying for loans or a job. Your credit report tracks your current activity and history, such as loan repayments, credit accounts and their limits and balances, foreclosure, bankruptcies, civil suits and judgments, outstanding child support, and other companies that have inquired about your score. It also includes more basic information like your name or any nicknames associated with your credit accounts, your address, SSN, and birthday. A company that accesses your credit report has your entire financial life on paper. Requesting your credit report can keep you informed on everything companies can see. Once a year you are allowed a free credit report from all three credit Bureaus at annualcreditreport.com. When checking your report you should look out for these three kinds of errors:
Mistakes in your name, address, place of employment
Mixed File: when accounts from another consumer with the same or similar name appear on your report
False Accounts as a result of identity theft
Incorrect Reporting of Account Status:
Same debt relisted (possibly under an alternate name)
Closed accounts reported as open
Mistakenly reported as owner of an account instead of an authorized user
Mistaken reports of a late payment or delinquent account
Incorrect date of last payment, date opened, or date of first delinquency
Accounts with incorrect limits
Accounts with incorrect balances
Dispute Report Errors
So you spot a mistake on your report. What now? Don't panic! Disputing errors can be a lengthy process, but you can make it easier by following these steps
First, determine the Bureau (TransUnion, Equifax, Experian) from the mistaken report came from. You will have to write a letter to them clearly stating your name, address, and phone number, followed by the report confirmation number. Next, you must clearly identify the mistake present, for example, an incorrect account, followed by why you are disputing it. You must also include a copy of your report with the mistake clearly labeled, and documentation that proves your dispute. You should never send original physical documentation as proof to the Bureau; instead, send a copy of the paperwork. If sent by mail, you should also ask for a return receipt as confirmation that your letter was sent. For greater ease, you may also contact the Bureaus online or over the phone to dispute errors:
Equifax: Online: www.ai.equifax.com/CreditInvestigation
Phone: (866) 349-5191
Experian: Online: www.experian.com/disputes/main.html
Phone: (888) 397-3742
TransUnion: Online: https://dispute.transunion.com
Phone: (800) 916-8800
You may also choose to dispute the error with the company it is coming from, also known as the furnisher. Depending on the information, the furnisher may be a student loan agency, apartment landlord, or a bank. You should also contact them via email, mail, or phone, ideally obtaining some type of verification of any outcome of the discussion.
So what happens after you submit a dispute?
After submitting a dispute, Bureaus will typically follow up with you. They will forward all documentation to the furnisher for further investigation. If the discrepancy is in fact proven to be an error, however, furnishers must inform credit Bureaus so they can formulate their new credit report with the correct information. However, even if the discrepancy is actually proven to be true, you can request that a copy of your dispute be kept on file by Bureaus; this will make the claim visible to any company that requests your credit report in the future.
Others Ways to Improve Your Credit
Avoid Late Payments
Late payments happen. Maybe the bill slipped your mind or got lost in a sea of emails. But missed payments can be a real blemish on your credit report. Credit-collecting companies usually will not report to Bureaus until 30 days after the missed payment, however, you might still face fees or other penalties from the company itself. To avoid late payments, try setting a reminder on your phone or scheduling automatic bill payment on your debit account.
Build a Strong Credit Average
If you’re like most people, you probably got your first credit card straight out of high school or in college, falling into the allure of “free money.” Now that you’re older and wiser, it may be tempting to cut up those old cards and start anew. But your credit score might say otherwise. Building a strong credit age allows creditors to establish a familiarity with you, which will be shown on your score. Five years or more of good credit with the same company will put you at an advantage over shorter account holders. Maintaining your trusty card might just be the key to cracking into the 800s.
Get a Secure Card
Secured cards are similar to a standard credit card but instead of using credit from a lender, you put a deposit on the card, which then becomes your credit line. These types of cards are a great way to assure that you never spend more than you can afford. If you deposit $300 on the card, only $300 dollars will be available to spend. The higher the deposit, the more credit is extended, though sometimes, as a reward, banks offer a complementary raise of your limit without any further deposit.
Secure cards are a good way to boost your credit if you are just starting out or are recovering from a payment mishap. However, you should not keep these kinds of cards for longer than you have to, as they tend to have higher annual and interest fees than an unsecured card. As soon as you are comfortable in the regime of charging and paying off your debt, it would be smart to switch to a regular unsecured card.
Watch Your Credit Utilization Percentage
In order to establish the most creditworthiness, it is recommended that you stay below a 30% utilization ratio. This means you are only using less third of the credit available to you. When you exceed this number is, it damages your trustworthiness with lenders (which is why maxing out your card is a huge financial faux pas.)
It is for this reason that having unused credit cards might not be a bad idea. Having the cards open without any charges to them lowers your utilization rate, making you appear to be a more responsible consumer.
But we know that events, vacation and big purchases do pop up, so if you plan to use above 30%, try pre-paying some of the debt the month before to keep that number as low as possible.
Credit can be confusing. How to get it, how to maintain it, what can hurt it. But we hope these tips made the topic a little less daunting. With good credit can come an exciting future, stable finances, and most importantly, the home of your dreams. If you're in the market for a new home you can visit our website at tomcrimminsrealty.com or contact our office at (718) 370-3200