Your credit score. That magical number that holds the key to getting a home loan or not getting one. What is a credit score and what should you be doing (or not doing) to improve yours? Your credit rating can be thought of as a kind of indicator, which potential lenders of all kinds will use to predict how likely you are to repay a debt. The higher your score, the higher the odds that they will get back the funds (with interest of course) that you're applying for.
Your individual rating is based on a number of factors that paint creditors a big picture of your income, spending habits, and ability and willingness to manage your assets (budget) and pay in a timely manner. That said, there are many things that you can and should do that will improve your score. In this post, we will focus on some things that you should NOT do. Read on for tips on things to avoid in your credit repair process.
1. Closing an old credit account.
You’ve finally paid down your high-interest credit cards, after YEARS of struggling to keep up with the ever-growing interest payments. Time to close the accounts so you won’t fall into the credit trap again, right? Not quite. While this one might seem counter-intuitive, closing an old credit account that you’ve finally paid off, can do more harm than good.
Credit scoring institutions base your score on many factors, not just how well you keep up with payments. One of those factors is the average age of the accounts you have open. The higher the average, the better. Instead, leave the account open and keep the card somewhere it will be safe AND less tempting to use (a safe-deposit box, home safe, etc).
2. Not using your card at all.
It’s often assumed that it’s better to not use a card than to use it and get buried in debt again. While this is true, not using credit AT ALL fails to show creditors a consistent payment history. Did the account holder pay on time every month? Were they frequently late? These are questions that are extremely important to potential lenders, and can only be answered by a proven, steady payment history. The best thing you can do for your credit is charge a nominal amount, and then pay it off each month. Using your credit and making consistent, timely payments is the easiest way to improve your score over time.
3. Ignoring collection agencies.
We all know how stressful and irritating it is to be pestered by bill collectors. They call day and night, bother you at work, even call family members- they are the textbook definition of “persistent”. Avoiding them like the plague might seem like the best thing to do, however, in the long run, this tactic doesn’t help you any more than it helps them. Nearly all collection agencies will work with you to set up a payment plan that fits your budget, or even settle with you for a fraction of the original debt. If you stick with the payment plan, the constant phone calls stop, and you are one step closer to repairing your credit.
4. Not keeping track of your credit profile.
Not only will consistently monitoring your credit help improve your score through financial awareness, it is also a great way to be alerted to mistakes or malicious activity such as identity theft or credit card fraud that might be affecting your score. Perhaps you even have something on your credit profile already that you were unaware of. Credit rating agencies (Experian, Equifax, etc.), banks, and even some credit card companies offer credit monitoring, either for free or a monthly subscription fee. You are also entitled to one free 3-agency credit report per year. Sites such as freecreditreport.com and creditkarma.com are great places to start. Being aware of what’s going on with your credit is vital to improving your score and getting that dream home. Make it a top priority and check your credit profile monthly!