In the early 1900s, merchants began their “credit” reporting system on customers with whom they dealt. They would exchange information on those clients and gain a sense of the risks involve with lending to various people.* This system, though elementary and perhaps even archaic by today’s reporting standards – highly steeped in empirical analysis, laid much of the groundwork for making our world turn.
Thanks to the advent of computerized systems, we now have a structure in place where consumer risk can be calculated with a fine tooth comb. There are some who don’t perceive this as an advantage, namely those who because of their credit have a hard time scoring a loan with a reasonable interest rate or landing a loan at all. A low credit score can spell disaster for prospective buyers in their hopes of acquiring a mortgage to purchase a home. There’s hope and a way to achieve the financial freedom needed to become a homeowner.
Here are three quick suggestions for improving your credit score, starting today:
1. The largest part of your FICO credit score (35%**), which ranges from 300 (terrible credit) to 850 (superb credit), is your payment history. Don’t get behind on your payments and if you do, pay off those past due balances. You’ll want to avoid those situations, especially where as time passes those creditors might send your missing payments off to collection agencies.
2. Naturally another area you’d want to keep in check is your debt. The amount of outstanding money you owe creditors can have an impact on your score. If you have the money, typically paying it down would be a way to improve your score, over time. If you’re having a hard time coming up with the cash, inspect your monthly budget/expenses or think about other sacrifices you can make in order to pay some of it down; it should pay off for you in the long run.
3. Think twice about opening new lines of credit. Although it might be necessary now and then, commencing new accounts can hurt your score in two ways. First, any time a new account is opened, an inquiry on your report is made, often lowering your score. Secondly, your average credit age (another big factor in setting your FICO score**) can conceivably take a huge hit when a new line is started.
There are other factors that you should explore as well such as leaving accounts open, or being aware of or reporting any errors which may exist on your report. At times it can be overwhelming, and if you’re struggling to gain financial freedom or finding it difficult to purchase a home, you unfortunately know the feeling all too well. There are certainly resources available for those in need.
Perhaps the most important step you can take out of the gates is acquiring a copy of your credit report from the three major credit bureaus (Experian, Equifax and Transunion). Where can you get it, you ask? “You're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies. Order online from annualcreditreport.com, the only authorized website for free credit reports, or call 1-877-322-8228. You will need to provide your name, address, social security number, and date of birth to verify your identity.” (Federal Trade Commission)
Next, reach out to your creditors if you’re struggling to pay some of your bills. Many of them have hardship programs in place to assist consumers. There’s a plethora of other resources out there like Jerrold Mundis’ book How To Get Out Of Debt, Stay Out Of Debt, And Live Prosperously, the Better Credit blog, the National Foundation For Credit Counseling (NFCC) or the Financial Counseling Association Of America (FCAA), just to name a few.
Nowadays, credit scores don’t necessarily save our world, but they do (for better or worse) provide a barometer to evaluate consumer risk. In real estate, this can at times stifle the dreams of first-time homebuyers, among others, who may need to be patient, determined and rent for a few more years before making that leap to a home purchase. In contrast, these scores reassure investors, and in some ways, provide better protection for lending institutions.
* “Credit Scores – What You Should Know About Your Own” (PBS - http://www.pbs.org/wgbh/pages/frontline/shows/credit/more/scores.html)
** “How FICO Credit Score Is Calculated” (http://www.myfico.com/credit-education/whats-in-your-credit-score)