Many people today have errors in their credit reports. Whether it’s a dreaded case of identity theft or late payment of bills, these credit mishaps can cost a person thousands in interest if left uncorrected.
Let’s take a look:
What Makes a Credit Score? A credit score is made up of five components. Payment history (35%), existing balances (30%), credit history (15%), mixed accounts (10%) and inquiries (10%).
The payment history is based on the agreed and timely payment of invoices. Most of the payment history is based on the last six months and the highest weight is on the highest payment history. For example, a mortgage loan would be evaluated first and then the next highest payment, be it a car loan or a credit card with a high payment, would be evaluated next.
Retained balances are valued based on the balance to limit ratio. Since this component accounts for 30% of the credit score, it is best to keep the balance to limit ratio low. Let’s look at an example.
Let’s say a borrower has two credit card accounts, a Visa with Citibank and a Visa with Bank of America, and both accounts have a credit limit of $10,000, but one is exhausted and the other has no balance.
If the credit accounts remain unchanged, this will result in a lower credit score since the balance between the account balance and the credit limit is 100%.
On the other hand, if the borrower split the balance between the two accounts and owed $5,000 on each, the balance to credit limit ratio would be only 50%, which would have a positive credit impact and create a higher credit rating.
It is important to note that mortgage and/or installment loans do not require the same approach as they have less impact on the balances carry component.
Credit history simply means the longer the account has been open, the higher the credit score. However, in order to achieve the higher credit rating, the accounts must be paid as agreed.
In addition, many people have been advised to close accounts they never use. Not the case! This can even have a negative impact on creditworthiness. Never close old credit accounts, especially if the accounts have a long history.
account mix. The ideal credit rating is made up of both installment and revolving accounts and looks like this:
-3-5 credit cards (or more)
If you get an equity line of credit, also apply for a loan amount greater than $40,000. If the HELOC is greater than $40,000, it falls into the mortgage category. If the HELOC is $40,000 or less, it is classified as a revolving account. Maximize the HELOC and it will negatively affect your credit score.
Inquiries must consider several factors. First, when borrowers are looking for a mortgage or car, they have forty-five days to complete their shopping spree. If all credit reports are obtained within forty-five days, this only counts as one request. For example, if a borrower applies to one mortgage company and decides to switch to another mortgage company, both requests only count as one as long as the second mortgage company obtains the credit report within 45 days.
However, if the borrower is buying both a mortgage and a car, one request counts for each.
Each query averaged about five points. After 10 queries per year, queries no longer affect the score.
Some types of inquiries do not affect credit scores at all. When applying for a job, a job-related request does not affect the score. When filing an insurance application or opening a new utility account (e.g. phone, cable, etc.). When a lender automatically reviews your credit account to confirm other accounts have been paid on time and credit limits are not exhausted. When an individual receives a personal credit report through And when pre-approved promotional credit card offers come in the mail.
Bad credit can be very costly, leading to higher interest rates on mortgages, car loans, credit cards, and insurance premiums. By taking the following steps to improve your credit score, you can save hundreds or even thousands of dollars over the life of a loan.
Here are five easy steps to increase your credit score by 100 points in 45 days. 1) pay overdue accounts, 2) get rid of late payments, 3) have credit limits increased, 4) become an authorized user, and 5) don’t close old accounts. Let’s take a look at each one.
Pay off any accounts that show an overdue balance on your credit report. Past due accounts do not necessarily mean 30 days late, past due accounts can be 1 day late and shown as past due on a credit report. This can seriously affect a credit rating. Pay off all overdue bills as soon as possible to increase credit score.
However, past due accounts do not include judgments and recoveries. It is best not to make any judgments or collection payments when applying for a mortgage. If possible, wait for the escrow to end and pay at the close. Payment decisions or collections can negatively impact credit scores as the “last activity” date is updated when the account is paid and the collection appears more recent than it may have been, negatively impacting credit scores.
Get late payments removed by contacting creditors and requesting late payment removal. If your first attempt is unsuccessful, try again and work your way up the ladder to becoming a manager. Be persistent because every time you call, a new employee will answer the phone.
If you are successful and the creditor agrees to remove the delay, be sure to request a letter. The letter must be on the creditor’s company letterhead, must be signed by an employee, and the letter must document your name, address, account number, and the specific late payment or late payments to be removed.
Also, make sure you get the name of the representative you spoke to and a contact number and extension just in case you don’t receive the letter and need to follow up.
Increasing your credit limits can increase your credit score. About every six months, call each creditor and ask them to increase your credit limit. Be sure to request that the increase be made based on your good credit history. If the creditor insists that a credit report be taken, think twice before agreeing as this will count as a request and will negatively affect your credit report.
Become an authorized user on a relative or friend’s credit account. But if they agree, make sure the account was paid on time and the current balance-to-limit ratio is less than 10%. If the account has late payments or has a high balance-to-ratio limit, it will negatively affect your credit report.
Be sure to tell your relative or friend that there is no risk as the credit card will be mailed to the account holder and you will not be able to use the card unless he provides the card to you.
Don’t close accounts, even if you’ve heard that old accounts that you no longer use should be closed. Keep accounts open and use accounts that have regularly become inactive. However, if you debit the account, be sure to pay the balance in full immediately upon receipt of the invoice. Purchasing a tank of fuel and withdrawing it activates inactive accounts and reports them as up to date and in good standing. Closing accounts can actually lower your credit score, especially if the account has a long credit history.
Summary. In order to achieve a high credit rating, proceed as follows. Borrow money when you don’t need it, and when you need money, creditors may not give it to you.
Keep the balance-to-limit ratio low; Don’t exhaust credit cards. If you must use credit cards, be sure to spread them across multiple accounts.
For a quick improvement in your credit score, request a credit score when a creditor removes a delay and provides a letter. For a fee, your credit score will increase in just a few days, which could help you get a better interest rate.
Never pay out a judgment or collection when applying for a mortgage loan. Try to negotiate that the account will be paid in escrow.
Raising your credit score by just 10 points will save you $100,000 in interest on a $500,000 mortgage over 30 years.
Overall, it’s worth investing the time to clean up the blemishes on your credit report.
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