If there is one message that we’ve all received, it is the importance of a good credit score. Sometimes, though, life throws a financial curveball and your score declines. What steps can you take to repair it?
Reduce your credit utilization ratio. Your credit utilization ratio (CUR) is the percentage of a credit card’s debt limit that you are using. Simply stated, if you have a credit card with a limit of $1,500 and you have $1,300 borrowed on it right now, the CUR for that card is 87%. Carrying lower balances on your credit cards tilts the CUR in your favor and promotes a better credit score.
Review your credit reports for errors. You probably know that you are entitled to receive one free credit report per year from each of the three major U.S. credit reporting agencies – Equifax, Experian, and TransUnion. As part of your credit review process, request a report from all three at once. You can do so at annualcreditreport.com. About 20% of credit reports contain mistakes. Upon review, some borrowers spot credit card fraud; some notice botched account details or identity errors. At its website, the CFPB offers sample letters and instructions you can use to dispute errors.
Behavior makes a difference. Credit card issuers, lenders, and credit agencies believe that payment history paints a reliable picture of future borrower behavior. Whether you pay off your balance in full, whether you routinely max out your account each month, and the age of your account are all factors affecting that portrait.
Think about getting another credit card or two. Your credit utilization ratio is calculated across all your credit card accounts, in respect to your total monthly borrowing limit. So, if you have a $1,200 balance on a card with a $1,500 monthly limit and you open two more credit card accounts with $1,500 monthly limits, you will markedly lower your CUR in the process. There are potential short-term downsides to this move – your credit card accounts will have lower average longevity, and the issuer of the new card will, of course, look at your credit history.
Think twice about closing credit cards you rarely use. When you realize that your CUR takes all the credit cards you have into account, you realize that access to credit is important. The key is to avoid maintaining higher balances as a result of having access to higher credit amounts.
15% of your credit score is based on the length of your credit history – how long your accounts have been open and the pattern of use and payments per account. This represents another downside to closing out older, little-used credit cards.
If you are concerned about your ability to use additional credit availability responsibly, don’t utilize the strategy.
Alternative credit scoring systems have emerged. If your credit history has taken a big hit or is spotty, new credit scoring systems may be a benefit to you. TransUnion’s CreditVision Link, the LexisNexis Risk View Score, and the FICO XD2 and UltraFICO scores compiled by Fair Isaac Co. (FICO) are examples. These systems introduced new scoring criteria for borrowers who may be creditworthy, but lack sufficient credit history to build a traditional credit score or need to rebuild their scores. Cell phone payments, cable TV payments, property records, and other types of data are used by these systems in order to set a credit score.
The ability to borrow money is a cornerstone of the way our economic system functions. If you are finding yourself struggling with debt or unable to access financing for important purchases, Wisdom Wealth Strategies and expert partners in our community have resources to help. We welcome your call.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.