Now that it's spring and the peak real estate season is upon us, I thought I would provide some helpful hints on how to manage your credit history and score.
Actually, anyone with a credit history has three credit scores calculated independently by each major credit reporting agency--Experian, Equifax and Transunion. These scores could vary widely, depending on the data the credit reporting agency uses. So if you're applying for a loan, it's a good idea to check with your prospective lender to see which agency's score they use before you apply.
Keep in mind that it's not just prospective lenders that use credit scores. Increasingly, insurance companies are using credit scores as one predictor, not only of on-time payments, but also of an individual's overall financial behavior that increases their level of risk. Financial institutions and employers are also checking credit scores to screen out undesirable applicants.
Though the formula to generate credit scores is complex and hasn't been disclosed to the general public, here are some rules to follow to help improve your scores.
Set dates for getting your credit reports. Annually, you should check each of your credit reports. AnnualCreditReport.com offers this free service. You should spread out your requests, making requests once per four month period, so you can catch errors that might come up at different parts of the year and spot potential identity theft. By maintaining these dates over time, you can mark them as a recurring event in your Palm Pilot or on your calendar.
Get your credit score once a year. A credit score is a three-digit number that reflects the credit history detailed by a person's credit report. Every year, you should visit MyFICO.com to retrieve your credit score from one or all of the three credit bureaus.
Lock up cards; don't cancel them. Do whatever it takes to limit your use of credit cards, but don't cancel credit card accounts once they're paid off. Why? Because your credit score relies on the number of credit lines you have open and in good standing and the length of time they're open. Lenders want to see a long record of credit management, and longtime accounts you haven't touched in years may actually help your score by showing you have some restraint. Remember to use them once a year and pay the full amount off immediately to keep credit cards active.
Pay on time. Nothing damages your credit standing faster than late payments, particularly on big loans like mortgages and car payments. It's extremely important to get current and pay in advance of the due date. Electronic bill paying eliminates mailing delays and gives you the ability to better manage payment dates. If paying by mail, I suggest mailing the payment five to seven days before the due date. Regardless of how you pay bills, it's a good practice to enter all bill due dates in your calendar.
Monitor credit problems. If you've filed for bankruptcy or had a debt put in collection, it takes years to remove those events from your credit record. Determine the month that data should leave your report and make sure you follow up to make sure that removal happens.
Choreograph your payments. If you have multiple balances you need to eliminate, schedule a payment order starting with the highest-rate balances first.
Keep your balances low. If you carry balances more than 50 percent of your credit limit on any account, it might lower your credit score. To remedy this, use several cards to spread out the balance--and pay them off--or ask the creditor to raise the limit on the card.
Limit your credit inquiries. Credit inquiries from potential lenders, solicited or unsolicited, can actually lower your score. This includes mortgage companies every time you get pre-approved and department stores that offer you a 10 percent discount if you open a charge card. This also applies to unsolicited credit card offers you receive in the mail. With this in mind, it's a good idea to remove yourself from direct mail lists. Visit GreenDimes.com to reduce your junk mail while helping the environment.
Research big loans in advance. Always ask a potential lender which credit bureau they use to make their decisions. Auto, mortgage and other lenders may prefer one credit bureau over another. So if you plan well ahead of your purchase, you should aim to correct errors in your credit report and get your credit score as high as possible.
Track your credit card spending. If you've never made a concerted attempt to track your credit card spending, do so staring this credit cycle. It can be as simple as a paper list or as sophisticated as a spreadsheet or money management software. Whatever tool you choose, tracking your spending will give you a forecast of your upcoming monthly bill. You can also track your recent charge card activity directly at the issuer's website. The goal is to know what your payment will be so that you can plan accordingly.
Debra Neiman, CFP, is and principal of Neiman & Associates Financial Services, a financial planning firm and registered investment advisor in Watertown, Massachusetts. She's also the co-author of the recently released book, Money Without Matrimony: The Unmarried Couple's Guide to Financial Security.