Thursday, October 18, 2007

Improving Your Credit

It is no secret that having good credit can pay large dividends. Consider the following that I pulled from the Federal Reserve Board website: “People with a good credit rating will pay approximately $250,000 less in interest throughout their working lives than those without. The impact of credit on financial well-being goes beyond access to credit and debt. Credit not only helps families buy a home, a business, or an education, but impacts opportunities for rental housing, transportation, employment, and access to checking, savings, and investment accounts.” Pretty large dividends indeed ...

Although some steps you can take are very simple and immediate, the bottom line is that building credit takes time. There is no overnight solution available and you should avoid resources that would suggest otherwise.

1. Review Your Credit. A very easy [but essential] first step – you won’t be able to move forward very well without knowing where you currently stand. Remember that you can do this for free under federal law. You are entitled to one report per agency per year for free.

2. Consistency. Pay your bills on time. The best way for someone to determine if you are a good “credit risk” is to look at how you have handled credit in the past … many banks offer bill-pay and other forms of auto pay (for little if any cost) to assist you in performing this task. Paying on time is the single most important thing you can do to build/maintain good credit.

3. Know How the Game Works. Companies will evaluate your creditworthiness based upon your credit score. Understanding how a score is calculated and the criteria involved is critical to improving one’s credit. The most common scoring model, Fair Isaac, considers five general areas:
--> Payment History (35%)
--> Amounts Owed (30%)
--> Length of Credit History (15%)
--> New Credit/Inquiries (10%)
--> Types of Credit Used (10%)

You can learn more about credit scoring at the MYFICO site. Also, Fair Isaac offers specific suggestions for improving your score.

4. Fix Mistakes. Some studies suggest that as many as 70% of credit reports have errors on them. Mistakes will count against you the same way that correct information will … make sure you take the time when reviewing your report (step 1) to correct inaccurate info.

5. Avoid Scams. Well-intentioned consumers are easy targets for scamsters offering to ‘fix’ one’s credit. These “credit repair” agencies offer [for a fee] to clean up your credit report so that you can enjoy the benefits of good credit (as outlined above). The reality? These companies don’t have the ability to do anything [legally] that you can’t do on your own behalf for free … STAY AWAY! The Federal Trade Commission offers helpful information to avoid scams.

Common warning signs of credit repair scams:
- Request payment prior to performing any services.
- Companies not informing you of your rights.
- Suggesting to not contact the credit reporting agencies.
- Companies offering to create a new identity for you.

6. Avoid Credit Myths. The world of credit is mired in misinformation. Avoid making mistakes out of ignorance.

7. Know the Law. Take time to familiarize yourself with the laws associated with credit. The Fair and Accurate Credit Transactions Act (FACTA) and Fair Credit Reporting Act are the primary ones.

8. Know Yourself. Building a positive credit history has value; however, understand yourself [and your personal vulnerabilities]. I would argue that the positive benefit of building credit isn’t worth the cost if it leads one to credit card or other financial problems … One recommendation for avoiding the potential financial problems that exposure to credit creates is to start small. Start with one account [with a specific purpose; like fuel purchases] and a small credit limit. A credit card is the easiest tool available to build credit, although any open-ended account (like a store card) reporting your payment history to the credit bureaus will work. An unsecured card with a low credit limit is a reasonable way to get started … you can also use a cosigner [who has good credit] to ‘lean’ on to open your first account if necessary.

9. Avoid Having Too Many Accounts. As you begin building credit, it is easy to quickly find yourself in a situation where you have more accounts than you know what to do with (let alone manage). Keep your situation simple – don’t burden yourself [or tempt yourself] with having too many credit accounts.

10. Be the Tortoise. People with poor [or no] credit are often impatient and wanting to quickly improve their credit and overall financial situation. Unfortunately, the only way out is a slow process. Although 7 years of information [for most items] will be visible on your credit report, the most recent 2 years are typically deemed to be the most important. So even if you’ve made mistakes in the past, you can resolve the problems but it will take time. Any invitation to fix it quickly is likely a scam.

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