To our readers: Today GoodCall examines credit. First, Terri Williams outlines the right financial decisions to make to improve your credit score. In our next post, Courtney Price Davis takes a look at whether moving affects your credit score.
Millennials typically experience a lot of firsts before the age of 30. From their first post-graduate jobs to the first time they’re solely responsible for rent or mortgage payments, millennials wade through a lot of major financial decisions. Like every generation, sometimes they may not make good choices.
A recent survey revealed that most millennials made at least one major financial mistake before the age of 30. These blunders include maxing out credit cards, missing payments, defaulting on loans, and/or having accounts sent to collections. These financial decisions can affect credit scores, which in turn, can affect just about everything from the ability to purchase a car or house to the interest rate charged for products and services.
Don’t despair. Here are steps that can be taken to repair a bad credit score:
Check/verify your credit score
The very first step before making any financial decisions is to ensure that your credit score is accurate. You may have an excellent score with one reporting agency and a poor score with another agency.
Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, tells GoodCall, “A credit score actually involves three scores from the three major credit reporting agencies: Equifax, Experian, and TransUnion.” Every year, each agency is required to provide consumers with a free credit report, Gallegos says. Reports can be accessed at www.annualcreditreport.com or by calling 877-322-8228.
Your score may be different at each agency because of different – potentially wrong information. Carefully review each report, looking for inconsistencies in your address, balances, and even creditor. If you locate an error, Gallegos recommends following the specific instructions listed on each bureau’s website as the best and the quickest way to resolve these issues. “Under terms of the Fair Credit Reporting Act, the credit bureaus must investigate any disputed items and remove them from the credit report if they cannot be verified,” Gallegos says.
Understand credit percentage utilization
This is a central part of your credit score. “If you have a credit card with a limit of $10,000, and you owe $3,500 on it, that’s 35 percent utilization” Gallegos explains. However, if you go over 35 percent, he says that high amount could negatively impact your score. “Over 50 percent will have a definite negative impact on a credit score, and a maxed-out card will very negatively impact the score,” Gallegos says. Bottom line: If you pay down your debt so it’s below 35 percent, it will help to improve your score.
However, there’s another tactic that you can use. Kelley Long, CPA/PFS and member of the AICPA’s Consumer Financial Advocates Group, agrees that millennials should pay down cards with high limits. “But also consider asking for a limit increase – some lenders will do this without a hard inquiry and the decrease in credit utilization will boost your score,” Long says. Warning: If you’re the type of person who would continue charging and eventually max out the new limit, don’t dig yourself deeper into a debt hole.
So what is this hard inquiry that Long mentioned? It occurs when you apply for credit, or other types of situations in which a company would need to check your credit score to determine if they will allow you to rent a car, purchase a cellphone, etc. However, when you check your own credit score, it’s considered a soft inquiry, and does not negatively impact your score.
Financial decisions: Should you stop using your credit card?
While a maxxed out credit card can negatively impact your credit score, don’t make the mistake of thinking that the solution is to never borrow or use your credit card. Gallegos explains, “Credit agencies rely on past payment history to gauge how borrowers will do in the future, and if you don’t borrow, they have no information to rely on.” However, he recommends that millennials choose one card to use. Also, evaluate the use of your card. For example, a recent survey revealed that some people use credit cards to pay tuition. That’s among the worst financial decisions since it involves not only high credit card interest rates but also 3rd party transaction fees at an average of 2.62 percent.
Pay your bills on time
It sounds like the simplest of financial decisions, but it’s the best way to improve your credit score – or keep your pristine score intact. “Make all payments on time all the time,” Long says. “That’s the number one thing you can do.” You’ll see faster results if you start paying down the bills with the largest interest rates first, since a lot of your money is being eaten up in interest.
Make and stick to a budget
While budgeting isn’t usually listed among ways to improve your credit score, there is a direct link between the two. According to Leonard Wright, CPA/PFS and member of the AICPA’s Consumer Financial Advocates Group, budgeting may not directly impact your score, but if you don’t do it, your score will be affected.
“Always budget: by staying on top of random and unexpected bills through budgeting, you will be less likely to overspend, which results in credit cards near their limit and a lower credit card score,” Wright says. For millennials who need help in this area, Wright recommends such resources as 360finlit.org and feedthepig.org.
Don’t use credit repair companies
Don’t be fooled by those credit repair service ads promising to quickly improve your credit score. Gallegos says these companies dispute items on your credit report – which temporarily improves the score while the lenders are researching the charge. Simply put, this is not among the wisest financial decisions: “There is nothing that a credit repair service can do that consumers can’t do themselves.”
Also, you may end up spending a lot of money without seeing any lasting results. Gallegos explains, “Once a dispute has been filed, the onus is on the credit reporting agency to remove or suspend that account from the consumer’s record until the dispute has been resolved one way or the other.”