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An Explanation On How to Save Your Credit Reputation

Improve Your Credit Score to Open Doors Otherwise Not Open

How is your credit score looking these days? Knowing the answer to that question is an important piece of your financial puzzle. It will be especially important to find out so you can improve your credit score, if necessary.

You need to know how your credit is looking before you can make the decision to improve it.

Why might you need to improve your credit score?

I’ll answer that question with a question: Are you planning to make a large purchase anytime in the future?

A house, furniture or a car?

If that’s the case a lesson or several in how to improve your credit score may be in order!

Lesson #1: Improve Your Credit Score with Knowledge

Whoever said knowledge is power was right. Truly it is.

  • You need to be aware of what your credit report consists of and how that translates into your credit score.
  • You need to know that your credit report may have discrepancies and what to do about them.
  • You need to understand how your credit is built and how to maneuver using credit utilization to improve your credit score!

So let’s start with the basics…what is a credit report and what exactly does it “report”?

Lesson #2: What’s in a Credit Report?

Are you punctual? Are you consistent? Are your payments on time every month?

Your credit report is a report card. It tells potential employers or lenders how well you’ve managed your finances.

Conversely, it also tells them if you routinely run late (here is where automating is really beneficial to paying on time) or if you’ve let a few important bills fall through the cracks (remember this for later).

Who is monitoring and compiling your credit reports?

There are three major credit reporting agencies:

  • Equifax
  • Experian
  • Transunion

They gather information from anyone you’ve done business with. They find out if you’ve been on time, been late or if you’ve ever defaulted on payments.

There are actually several categories that are pulled together for your credit report and influence your credit score:

  • Paying bills on time
  • Credit history
  • Credit Types
  • Debt ratio

We will give you tips regarding these categories so that you can improve your credit score!

Lesson #3: Improve Your Credit Score by Finding Discrepancies

Whoever said that what you don’t know can’t hurt you was wrong. It might be hurting your credit score!

A low credit score could derail your future plans…unexpectedly.

Remember earlier when I said your credit report tells employers or lenders how well you’ve managed your finances? I also said the report will tell them if you’ve let a few important bills fall through the cracks.

Only, what if your credit report was wrong? What if nothing fell through the cracks but your credit report said it did?

Everybody should be checking their credit report for discrepancies!

It is quite common for a consumer to find mistakes on their credit report. If you are checking your report yearly (as you should be) and you find an error–you can take quick action to have it removed.

What action do you need to take to remove an error and improve your credit score?

Write a letter to the credit bureau detailing why the reported information is wrong (or submit this information online). You can find sample dispute letters online.

Provide a copy of any supporting documents (always keep your originals).

It will take 30 days for the credit bureau to investigate and another five to send the results.

If something was corrected you can ask the credit reporting agency to send an updated copy to anyone who received the erroneous report in the last six months or an employer in the past two years.

I can’t overstate the importance of having an accurate credit report. Correcting your credit report means you can improve your credit score.

An accurate report will save you money on loan and credit card interest rates. It will also save you money on auto insurance premiums.

We’ve looked at how to improve your credit score to save you money, now let’s look at what underwriters look for when you are asking for a home loan!

Lesson #4: Build and Improve Your Credit Score with Utilization

If you want to improve your credit score you will need to think about credit utilization.

I think about it as a way lenders look to see how balanced you are with your debt to credit ratio.

What credit utilization?

It is the outstanding credit card balance ratio compared to your credit card limits.

A high utilization score means a lower credit report score.

It tells a lender that you are using a lot of the credit you’ve been offered.

A low utilization score means a higher credit report score.

It tells a lender that you are using a small portion of the credit you’ve been offered.

Keep in mind that utilization is per credit account (not cumulative across all accounts as many people assume).

Example: Oscar has five credit cards. Each credit card has a $30k limit. Oscar spends $2k on each card. That makes his utilization low for each card.

While you are a new attending physician with a solid credit history, you may also have a  lower credit score because your student loans are maxed out (only because you haven’t started paying them). This example just explains why your utilization may be very high early in your career.

Your goal is to keep utilization on individual accounts at 30%.

Here is another example:

Oscar has 28 credit cards.

On one card he put $5k (the card has a limit of $10k).

The utilization looks good on 27 of his cards.

The utilization looks bad on the card with $5k.

Why does it look bad on the card with $5k? The answer is because he has spent half the credit available to him. His utilization ratio is going up.

The goal to keep your revolving credit below 30%. You never want to look over utilized. Ask for a higher credit limit than you need, and charge an amount below 30% so that you are not penalized.

Lesson #5: Improve Your Credit Score for Underwriting

What is a mortgage underwriter?

Your lender wants to know what kind of risk they are taking when they offer you a home loan. Your mortgage underwriter is the person who determines your risk.

What do underwriters look for?

They look for the same categories that influence your credit score (you know: repayment history), but they also look for more factors than just the score.

They also look at your employment history, income and debts. They will look through your finances with a fine tooth comb: savings, checking accounts and other types of financial accounts.

Lastly, they look at your debt-to-income ratio.

Improve your credit score and you improve your chances of impressing the underwriter!

Improve Credit with Debt Utilization - Financial Residency

Here is an example using the information we learned above regarding Utilization:

You could have someone with a lot of open credit. They may owe a low amount but have a high credit score. This person would have a low utilization score. However, since there is a chance they could go out and rack up a lot of debt overnight, the underwriter would be wary.

Our examples included someone having 28 credit cards. There are people who have that many accounts. The question is how advisable is it? Will it improve your credit score?

Lesson #6: Taking Out Cards

The question is “will having more credit cards improve your credit score?”

The answer is that having more credit cards may or may not improve your credit score. That all depends on how you handle the accounts.

How many credit cards is ideal?

The ideal number of credit cards vary.

You don’t want so many that keeping track of your accounts becomes a nightmare. That could mean you lose track, get hacked without noticing and you lose your chance to improve your credit score.

If pressed I’d say three is an ideal amount of credit cards. That way you have a primary, a backup (in case the primary is hacked), and a third option.

If you do have several credit cards, you don’t want to get rid of any that have a long history. That history will benefit you when it’s time to improve your credit score.

Lesson #7: Build Credit

Here is a tip that not many people know: You can start building credit for your children. Right now.

You can piggyback your children on your credit!

My parents did it for me. I’ve also known others who started credit for their children this way, too. So, I’ll tell you how.

My parents opened a credit card when I was approximately one year old. At that time I was named as an authorized user. That means I have credit history that is 34 years, which is close to my current age!

That means when your children apply for their own credit cards they already have credit history.

They will have a jump start on their financial future!

Lesson #8: Improve Your Credit Score

Just so you won’t get confused a FICO score is a name brand for a credit score. Your FICO score and your credit score are the same things.

Do you need to improve your credit score?

I’ve mentioned that you shouldn’t close a long-standing credit account. That also stands when you are attempting to improve your credit score.

The rule is: Never close account when trying to boost your score!

Credit scores are based on how many accounts you have. The max is five or six accounts on the credit report. If you have a history of paying credit over several accounts it will improve your credit score.

Here is another example of using utilization to improve your credit score.

Let’s say you have a card that you’ve charged almost to the limit.  In order to improve your credit score, you can increase your credit line, which lowers your utilization.  

Some other quick methods to improve your credit score:

  • Pay off debt
  • Pay bills on time
  • Check your credit report for errors
  • Don’t apply for new credit (increased “hits”)

Automating payments is a simple step to making one of the tips easy to fulfil.

You want to be ready for life’s big events. There will come a day when you want to take out a mortgage or you need car loan.

You can improve your credit score. It takes some time and consistency. Start planning for that future inevitability now!

Physician Wealth ServicesLesson #9: Credit Inquiry

Anytime someone runs a credit inquiry, you are going to get “hit”. There is just no way around it.

The question is how many points does an inquiry take off your credit score?

The hit will be different based on how many credit cards you have open and your credit profile.

Something that a lot of people don’t know is that a “hit” is not permanent. It doesn’t do irreparable damage to your credit.

You will get 50% of the missing points back at the end of 30 days, in two months it will seem like there was never an inquiry!

If I ask you in a year how your credit is looking these days?  Will you know the answer to that question?

Remember the answer is an important piece in your financial picture that you can start working on today, especially if you need to improve your credit score.

You will most certainly know if there is a large purchase looming in your future. That will help you determine how soon you need to start checking credit score.

Don’t wait! Keeping on top of your credit score and what has been added to your credit report could save you a lot of grief later.

Keeping on top of your credit report means you have time to improve your credit score or dispute and resolve any reporting errors that could hold you back from reaching your goals!

 

What are you learning about your credit? How do you envision your financial future overall?

There’s audio for that! Be sure to subscribe to the show if you haven’t already!

Ryan Inman