Give Your Credit Report an Annual Checkup
The new year triggers motivation to make and achieve goals - some might be for your physical health and wellness, and some might be for your financial health and wellness. A place to start with your financial wellness includes a yearly credit-report review.
There are businesses that exist solely to scrutinize your credit history. Credit card companies and other lenders rely on this information, so your credit score determines your chances to borrow money — and how favorable the terms will be. The higher your credit score, the lower your interest rate.
The three major credit-reporting agencies—Equifax (www.equifax.com), Experian (www.experian.com), and TransUnion (www.tuc.com)—offer reports to you by mail or via the Internet. Order one from each; you should give your credit report a yearly checkup.
Credit scores can range from 200 to above 800. Scores below 620 are considered risky; 720 and above usually earns excellent rates and terms.
There are five categories used in determining a credit score:
1. Payment history (35% of score): Late payments and amount owed are the two areas scrutinized most closely.
2. Amount owed (30% of score): Large outstanding balances do not necessarily damage your score. The significant factor is the percentage of total available credit you’re using on your credit cards. Consolidating many small credit card balances onto one card actually causes your score to go down.
3. Length of credit history (15% of score): You need credit to get credit, so there’s no way to improve this part of your score other than to wait.
4. New credit (10% of score): Applying for too much new credit in a short period of time is a common and costly mistake. Your score drops from too many credit requests in a short time.
5. Types of credit (10% of score): This considers the overall mix of credit —loans, mortgages, credit cards, etc. Unfortunately, scoring companies won’t disclose how accounts are weighted.
Lenders receive your score and “reason codes,” so examine these reason codes; they’re the keys to improving your score. When you get your report in the mail, you'll also want to review the following items:
1. Check that all items are correct. Notify the credit bureau in writing if you see any inaccuracies. You can do this either online or via mail. Use certified mail to send them copies of documents that dispute the incorrect entries so you have a receipt of when they received the documents. They have 30 days from receipt to adjust or verify the data.
2. It’s possible that someone else’s information might be attributed to you. You have an obligation to correct the information.
3. Look for inactive accounts. Close any accounts you don’t use, but be aware that closing accounts may lower your score because it changes your credit limit/credit usage ratios.
4. Check for late payments. Request that those payments that are older than seven years are removed.
5. Verify and update your accounts and account numbers to ensure they are accurate.
6. Verify your address and Social Security number.
Start 2021 on the right financial foot by cleaning up your credit report. It could save you thousands this year and in the years ahead.