In part 1 of this series, we reviewed why credit scores are so important, talked about their special significance to service members, and discussed the basics of what a “good score” is and how scores are determined. In Parts 2 and 3, we’ll get more into the nitty-gritty of fixing a lower score and keeping a high one high.
- DO pay bills on time
This is obvious, of course, but it also can be very easy to mess up. Payment history accounts for 35% of a FICO credit score—the biggest chunk—so it’s very important. For those who have the money but just have problems remembering to pay on time, technology can be a huge help here; you can set up autopay, put reminders on your phone or calendar, or have creditors email or text reminders. If it’s easier, you can change your credit card payment date to the first or last of the month. Your recent payments are what are most crucial, so even if “mistakes were made,” get things into order now.
If finding the money is a concern, then the problem is a bigger one, but there are still solutions. The important thing is to set up a plan. Customers can work independently with their creditors to negotiate the terms of their debt and get a better deal on interest rates. They can also contact a credit counseling agency that employs certified credit counselors.
Don’t forget about the Servicemembers’ Civil Relief Act, which caps interest rates on active duty members at 6% when invoked. This important legal protection can really help members of the military get debt under control.
- DO maintain a mix of types of credit
This account for 10% of a credit score. FICO is looking for a mixture of secured and unsecured loans—basically, a combination of credit cards, student loans, mortgages, and car loans. This can be a little difficult to change or improve, but some experts say it may not be a bad idea for loan shoppers with a poor “mix” to diversify– well before they apply for the loan they really want.
- DO use credit…responsibly
Some people tend to think that their best bet is actually to avoid using credit at all, assuming that this will make them look responsible. But creditors want to know that people can handle responsibility, so it’s best to have lines of credit, use them, and pay them on time. Secured credit cards (where you put a deposit on the card) can be a good way to build a credit history if it’s not possible to get an unsecured card. Another option for building credit is to be added as an authorized user to another person’s account, meaning that you have the right to use his or her credit card. Obviously, this requires great trust on the cardholder’s part,
- DO settle any old past due accounts
Again, this should be obvious. But if any old balances from closed accounts are lingering out there, even if it’s $10 that went to collections from unpaid library fines, this needs to be taken care of. Even an unpaid parking ticket can cause a problem. Issues like these stay on a credit card report for 7-10 years.
- DO hold on to accounts you’ve had for a while
15% of a FICO credit score is based on the length of a person’s credit history. Creditors want to see that an applicant has been able to hold and maintain lines of credit for years without significant problems, so it’s a good idea to hold onto that card you’ve had for decades, even if it doesn’t get much use.
- DO watch your credit utilization ratio
Not many people are familiar with this term, which simply refers to the percent of your credit limit that you are currently using. However, it’s actually very important, accounting for 30% of a FICO score.
For instance, if a consumer has two cards, each with a $5000 limit, and currently owes $1,000, his or her credit utilization is 10%. Experts recommend keeping credit utilization below 30%, and 10% is even better.
But it’s a bit tricky, because the ratio can be high at some points even if a consumer pays off cards every month. (For instance, if a consumer charged $2,000 on each card one month, depending on when credit is checked, he or she might show up as being at 40%.) This is one reason why it can be good to have cards with high limits, if the limit is not abused.
If this is a concern when applying for credit, it’s possible to pay off a high balance early or pay twice a month. It’s even possible to call card issuers, find out exactly when they report balances, and readjust your payment date so that your balance will be reported when it’s pretty low. Or, if all this seems too complicated, simply don’t apply for a major loan in a month when cards have a lot of high charges.
- DO check the credit report
While a credit report and a credit score are not the same thing, checking one’s credit score ensures that nothing on it is duplicated, inaccurate, or out of date, and should be done at least once a year (the service is free from annualcreditreport.com). Remember, service members run an increased risk of identity theft, so this is especially important for this group! (Members can reduce their risk of fraud by putting an active duty alert on credit cards when serving overseas.) If there’s a mistake, it can and should be disputed with the three credit bureaus (Equifax, Experian and TransUnion).
- DO restrict “loan” shopping to a limited window
It can affect credit negatively if too many people are checking it too often, so when shopping for a loan (such as for a house or car), consumers should do so within a limited window of 30 days. When credit checks are clustered close together like this, it only “counts” as one credit pull, and doesn’t impact a credit score much at all.
For what it’s worth, checking one’s own credit score is what’s called a “soft” credit pull, and doesn’t have the same effect. However, it’s also worth knowing that credit checks may be done by sources we don’t expect, such as cell phone service providers and banks where we open accounts. If you’re not sure if a credit check might be done during a minor transaction, ask. It may be possible to skip it or do a “soft” check instead.
- DO start rebuilding credit well before shopping for a major loan
Many hope for a “quick fix” when trying to repair their credit, but in many cases, the cure for credit problems requires a hefty dose of both responsibility and time. Planning ahead will allow borrowers to get their ducks in a row as far as fixing any credit report problems, getting payments current, figuring out utilization ratios, and so on. If a consumer can handle sitting tight for a while, the score will likely go up, saving money over the long term.
In part 3 of this series, we’ll talk about the “don’ts” of boosting a credit score…stay tuned.