Improving your credit

We hear quite a bit of news about credit scores and credit bureaus. Why does this matter? And what should you do if your credit score could use some help? Your credit score is a three-digit number derived from detailed information about your credit history. Your credit score affects the rate of interest you pay on loans (car loans, home loans, privately consolidated student loans, etc.). The higher (and better) your credit score, the less interest you will have to pay each month and overall. Just look at this calculator to see how different interest rates and payment amounts impact the overall cost of a loan.

Various organizations provide different credit scores, though all are similarly calculated. The FICO score is the most widely used credit score. A FICO score ranges from 300 to 850, and those with scores of 740 and higher are typically entitled to the best interest rates. Your credit score is calculated based on your payment history, amounts owed, the length of your credit history, the extent of your new credit, and the variety of credit types you have used.

The federal government requires each of the major credit reporting agencies to provide a free credit report annually. Studies have shown that serious errors that affect credit scores are common on credit reports. Go to www.annualcreditreport.com to order your free credit report from Equifax, Trans Union, and/or Experian. You can also visit the credit reporting agencies’ websites directly. If you see any errors you can dispute them by contacting the company or lender in question or by contacting any of the three reporting agencies (each has a dispute form on its website).

Ways to improve your credit score:
If your credit score is low and there aren’t any errors on your report, there are several steps you can take to improve your credit score. There is no quick fix: improving your score is largely a matter of time (so don’t let it go south in the first place!).

1. Pay your bills on time.
2. Keep balances low on credit cards and other "revolving credit." High outstanding debt can affect a credit score. A good rule of thumb is to ensure all of your credit cards are at no more than 25% of their limit.
3. Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix. It probably won’t improve your credit score.
4. Pay off debt rather than moving it around. Also, don’t close unused cards as a short-term strategy to improve your credit score. Owing the same amount but having fewer open accounts may lower your credit score.

Contact the Granite team to see how a comprehensive financial plan can help you pursue your goals: Contact the Granite team.

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