Ideally, we would never have to think about having a problem with credit; however, sometimes mistakes happen and you need to know how to fix your credit. I was recently reminded of this. It is not something I’m proud of, but perhaps shows that I’m human!
I was working with a lender to get pre-approved for a loan. I hadn’t checked my credit in a couple of months, but it had certainly been this year and everything was fine. I gave the lender my information and they ran my credit. On the phone with her, she said, “Ms. Satterfield, your credit score is much lower than you expected it to be. There are two key things going on – you recently had a number of people access your credit file (this was due to our recent car purchase) and the other is really what’s driving it down. You have a credit card that hasn’t been paid for two months.”
I was in shock! I manage paying bills, and there was no way in my mind I had missed something! I had. I have one credit card that I opened when I was 24. It was my first credit card. It had a $500 limit, and I haven’t closed the card, because it’s my longest standing credit line. When I started MPower I used the card for a few things to keep items separate for accounting purposes.
A year ago, I had opened a card with more business rewards. I thought I had moved everything over to the new card. But, in February of this year I had an annual bill charge to the old card. So, I had missed the payment due in March and April.
The timing couldn’t have been worse. I was able to work with the merchant and have it rebilled to my current business credit card (where I intended for it to be charged), and because there was nothing else late on the card the credit card company refunded the late charges and fees (almost $100) and corrected my late reporting on my credit report. That was how I handled the situation to fix my credit, but it took a few days and maybe some years off my life.
So, if you are wondering how to fix your credit and improve your credit scores here are my tips:
Work to Establish a Long Credit History
In the world of credit it’s a catch-22. You need a credit history to be able to use credit.
I learned this the hard way. I was a 24 year old college graduate with a degree in personal financial planning. I had a good paying job. The main bill I had was my rent. I didn’t have student loans. My dad co-signed on a car loan, but I paid it off early.
I applied for my first credit card. It was a rewards card for travel, something I knew would be beneficial because I was traveling significantly for my good job. I got denied for the card. The reason – I didn’t have enough credit history to have a credit score. Therefore, in the eyes of the company I was an unknown and they weren’t willing to give me a line of credit. They didn’t know any of the information in the paragraph above.
To this day, Mark and I know that my credit score will be lower than his, because my credit history is much shorter than his. He’s five years older, and started using credit cards much earlier than I did.
So, the sooner you start using credit the better your credit worthiness will be. Of course, this requires using it responsibly (i.e. not missing payments, and paying it off in full each month).
Check Your Credit Before Applying For a Loan
Interestingly different types of lenders use different credit scoring systems. Generally speaking, mortgage lenders use a score that more heavily weighs on-time payments, whereas credit cards and auto lenders focus less on that and more on the overall creditworthiness of an individual.
This is why it’s really important to review your credit report prior to having a lender pull your credit report and score. There is only one place that MPower Co recommends reviewing your credit report: annualcreditreport.com. Anything with the word free in it is not recommended!
When you review your credit report identify any errors or issues that may be affecting your credit report/score and report them to the credit reporting agencies.
Consumer Reports recently conducted a study on credit reports and found that 34% of the volunteers in the study found errors on their credit report. Of those who found errors, 11% said the errors were related to debt they didn’t owe, had already paid off, or inaccurately reported a late or missed payment. All of this to say, it’s not unheard of to have credit report errors.
If you’re not familiar with Dr. Thia’s experience of having her identity stolen and how she identified it through review of her credit report, head over to this article!
Pay Down Debt If You’re Looking for How to Fix Your Credit
No matter which credit score method is used, all credit scores look at your credit utilization. This means, for all of the credit extended to you, how much do you owe.
For example, if you have three credit cards each with a line of credit equallying $5,000 ($15,000 total) but owe $13,000 in total on the three lines of credit, the utilization rate is over 86%. This is an extremely high utilization rate. Paying off the amount owed to below a 30% utilization rate (so below $4,500 for the example) will improve the credit worthiness of an individual.
The bottom line is that lenders like to see that you have lines of credit, have paid them on time, and are not using them now.
Pay off Debts in Collection As Quickly As Possible
Interestingly debts in collection are handled differently from a credit reporting standard. Typically, as soon as a debt in collection is paid off, the collections tag will not be used or will be weighed less heavily when determining your credit score. If you’re negotiating with a debt collector, you can negotiate that the collection notice be removed from your credit report once the debt is paid. Unlike laws that credit card companies have to report accurate information, collection agencies do not operate under such laws.
Do Mortgage Comparison Shopping within 30 Days
While credit card companies don’t typically like to see that you’re shopping around for credit cards (choose which card you want first and only apply for it), it’s a smart financial move to consider multiple mortgage lenders as mortgage rates and terms can vary.
Each time, though, that one of these mortgage lenders pulls your credit report and score, it’s considered a “hard pull,” which means that your credit score is likely to go down slightly for a year or two. By shopping around within the same 30 days, the effects of those hard pulls aren’t affecting your credit score from one lender to another. This means all mortgage lenders are operating on the same playing field with respect to your credit worthiness.
Avoid Closing Unused Lines of Credit
It may feel prudent to close out a line of credit once you are done paying on it. Let me instead encourage you to simply freeze the account so no charges can be placed on it. Why this is important is because when you close out lines of credit, your utilization rate will likely increase.
Sticking with the example above of someone who has three credit cards, say they close out one and now only have extended credit in the amount of $10,000. To stay under the 30% utilization rate, they need to stay under the $3,000 threshold instead of $4,500. It makes it easier to be over utilizing credits in the eyes of the algorithms.
There is a caveat to this, and Dr. Thia would give an example of an individual she worked with years ago who had over 100 credit lines extended through every store she had ever shopped at. If a card has a high annual fee or closing the card will help you control spending, then it may be worthwhile to think about. However, freezing the card and placing it in a safe place that isn’t easy to access, may still be a good option.
Other Financial Planning Resources By MPowerCo
Estate planning is a favorite topic over here at MPowerCo! Our biggest resource for you is our course Written Wishes, an all encompassing online course that will guide you through the estate planning process from beginning to end. Head over to the Written Wishes course page to get your wishes in place.
Free Financial Resource – Becoming a Millionaire Next Door
Besides our weekly newsletter we also have a free resource on becoming a millionaire next door. Becoming a Millionaire Next Door takes focus and time and using money wisely, like you are now set up to do with the car buying tips outlined in the article above! Click on this link to get your free download to be more financially savvy.