Tori Dillinger, Administrative Assistant
Our last blog gave a high-level overview of what credit is and how it impacts our lives. In today’s post, we will help you learn some “Do’s and Don’ts” to a good credit score.
Don’t use the maximum credit limit on your credit cards.
This is one way to go from 700 to 500 fast. The difference between the balance on your credit card and your maximum limit is what experts call a credit utilization ration. Using the maximum balances on credit cards tells creditors that you don’t have a plan in case of an emergency. If you’re in a situation where you lose your income unexpectedly, you won’t have any way to support yourself while you search for a new job. This makes you a high risk.
Pro-Tip: Keep your credit balance below 30% of your total credit limit. An even better option is to keep it where you can pay it off each month. If you pay off your balance before your statement each month, you won’t be charged interest. This means as my teacher Mr. Leonard said, “You get to use other people’s money for free.” So, get a credit card and buy one tank of gas each month, and then pay it off each month. Your score will thank you.
Do pay your bills on time.
The most obvious but most important way to improve your credit score is to pay your bills on time. Repeatedly paying your bills on time and in full shows potential lenders that you can be trusted to pay back what they loan you. Make a point to keep track of when your bills are do, and plan in advance how you will need to budget to pay them.
Pro-Tip: In addition to paying your bills on time, consider making payments over the minimum. As noted on our previous blog post about mortgages, just paying a little bit extra every month can lead to huge savings in the long run. Below is an example on what a difference paying more can make:
Don’t take on too much debt, especially close together.
If you read our last post, you know that lenders like to see diversity in your credit history. However, each time you take out a loan it temporarily decreases your credit score. Lenders want to see that you can take on the additional responsibility before they agree to lend you more money. Be thoughtful of this when looking to take out more debt. Did you just get a new car loan? Then maybe now is not the best time to take up your favorite retailer on their new credit card offer. In general, it is better both for your credit score and your own money-management to start with one line of credit then slowly add others over time.
More important than how recently you have opened up a credit account is how much of your income is already taken up by your existing debts. This is measured through your debt-to-income ratio or DTI. Most lenders require a DTI of 40% or lower. To determine your DTI, take your total debt payments each month and divide them by your total monthly income. Below is a link to help you. If you are above a 40% DTI, it is probably better for you to pay down existing debts than take on any new ones.
Pro-Tip: Mortgage, auto and student loan inquiries will not be reflected on your credit score for 14-45 days depending on the calculations used. Even when they are reflected, inquiries usually only play a very small role in your overall score. This means you don’t have to be afraid of shopping around for better terms when taking out major loans.
Do check your credit score regularly.
Checking your credit score allows you to find any problems or red flags and address them before they become a problem. By law, each of the credit reporting bureaus must allow you to pull your credit history once a year for free. The three major credit reporting agencies are Equifax, Experian, and TransUnion. One trusted way to access your annual report is to go to annualcreditreport.com. You can also go directly to each agency’s site. Be careful of websites offering free credit reports. There are a lot of scams and fake offers out there.
Pro-Tip: You don’t have to pull your annual credit report from all three credit reporting agencies at once. To allow more frequent reviews of your credit history, consider pulling your credit report from one agency every 4 months.
Don’t just let bad marks sit on your credit and do nothing about it.
Yes, you paid those bills late because you were young and dumb, but now you’re older and wiser and it’s time your credit score reflects that. Now that you’ve been current on your bills for a few years, it’s time to write a letter and explain to the creditors why you paid those bills late and ask nicely that those bad marks be removed. And be honest about it – as Kathy, our foreclosure prevention officer, put it, “Paint me a picture of why you couldn’t pay these bills.”
Pro-Tip: Call the actual company that you paid late first and ask to be refunded those late fees. It’ll look better to the crediting agencies if the company forgave the late payment. Second, talk to the crediting bureaus. You can write a letter and send it through the mail or you can actually submit the dispute online. I just went and did it before writing this paragraph just to be sure. It’s easier than setting up a Facebook account. You only have 250 characters to get your point across, but it’s easy to do and took less than 30 minutes to setup an account on all three crediting sites and complete. The three agencies are Equifax, Experian, and TransUnion. I was also able to see all of my negative and positive marks on my report. It definitely showed me how far I’ve come… Some say that bad marks can’t be erased, but all the crediting companies can do is say No, so it’s worth a shot!
Do reach out to HUD-certified counseling agencies like HOPE of Evansville when thinking about purchasing a home.
Agencies like HOPE can provide unbiased credit counseling and help you create a roadmap for home ownership. Income qualified individuals may also be eligible for additional resources such as down payment assistance and savings matches. All services are provided at a low cost ($35-$80 in the case of HOPE) by HUD-certified housing counselors.
Establishing and maintaining good credit can be a challenge, but you don’t have to go-it alone. HUD-certified counseling agencies like HOPE of Evansville can help with one-on-one credit counseling. Contact our pre-purchase housing counselor Tony Ajibade at firstname.lastname@example.org or (812)423-3169 ext. 104.