Clean up your credit
by Carla Hill
More than ever having a healthy credit score is important. It may mean the difference between securing a home loan or not. Don’t let old habits or debts stand in your way of taking advantage of historically low interest rates and great deals on housing.
The first order of business is to arm yourself with the cold, hard facts. What is the state of your credit report and score? You can visit annualcreditreport.com three times a year for free to view your credit report. You will have to pay a nominal fee in order to view your score.
Once you have accessed your report be sure to check it over carefully for errors. This is not a time to let identity thieves abscond with your good name. Besides identity theft there may also be errors and omissions that should be corrected. Contact each of the three major credit reporting bureaus to have your report updated.
There are also many programs available today to protect against identity theft. Many banks now offer convenient ways to monitor account and card activity. If unusual spending shows up on your account they will halt any purchases and contact you immediately to confirm you are in fact the person making them.
Now that your existing report is in good working order and safeguarded from theft, it’s time to start making repairs. First reduce the amount of hard inquiries. The home buying process is not a time to start opening new accounts and lines of credits.
Resist the urge to buy the new car, call DirecTV, and buy new furniture on credit. Wait to make those purchases after you’ve closed on your home. Your future interest rates will reflect your patience.
Start paying down balances on credit cards. While some revolving accounts like car payment and home mortgages show you are a responsible borrower, having high balances on your cards dramatically reduces your score.
Don’t pay off cards just to close them, however, if you’re looking to raise your score. The way this works is simple. If you have a total of $10,000 in credit available and you carry a balance of $5,000, you are using 50% of your available credit. That is too high.
If you close a card and are using $5,000 of now $7,000 available credit, you are using 71 percent of your available credit and are worse off than you were!
The key is to start paying down balances and keep that percentage low. Once you’re positive that your mortgage and loans are in place you can then consider closing card accounts.
Next, never pay late. If you need to set up payment reminders or automatic withdrawals for certain bills in order to pay on time then by all means do it.
If you fear that you will miss a payment or will be late be sure to contact lenders or creditors before this happens. Many lenders will work with you without reporting the missed month to the credit bureaus. Every reported late payment docks your score and stays on your report for years.
Finally, pay off debt instead of moving it from one card to another. It might be tempting to put this debt on that card and so on, but that doesn’t remove the history from your credit report. In fact, if you have now opened a new card, you might have just dinged your score.
Responsible spending and payments are how you build a credit report. There is no overnight fix to a score (don’t buy into those scams)! Do your work to pay down debt and over the next months and years your credit score will soar sky-high.