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January 2010

Improve Your Credit Score

The beginning of the year is a great time to begin improving your credit score. Start by ordering your free credit report from each of the three major credit-reporting agencies—TransUnion, Experian, and Equifax—by going to www.annualcreditreport.com on the web or by calling toll-free 1-877-322-8228. Carefully check the report and follow the correction process outlined by the credit-reporting agency if you find errors. Wrong information could have a significant impact on your credit score, your ability to obtain a loan, or the best loan rates and terms.

You are likely to have several credit scores and your points will vary depending on which credit-reporting agency you use. Keep in mind your score is intended to predict your future ability to pay off credit you obtain. It is not a report on your employment history, job income, or on what you own. Therefore, you could be a top-notch manager of your family’s finances, but this may not have any impact on your credit score.

Your FICO credit score, for example, is based 30 percent on credit utilization, 35 percent on paying your bills on time, 10 percent on the type of debt you have, 10 percent on the number of new accounts you have during a specific time period, and 10 percent on the length of time you have been granted credit.

First, regarding credit utilization, I recently learned my credit score suffered a several-point loss because I use my personal credit card to charge items for work, even though I pay off my balance in full each month. Credit card issuers become concerned if you regularly charge more than 50 percent of your credit limit.

Second, avoid making late payments if you can. Late payments will not only trigger the credit card company to charge hefty fees and raise your interest rate, but it may also cause your credit score to fall if the company reports the late payment right away. Fortunately, most credit card companies won’t report until you have missed two due dates.

Third, too many of a certain type of loan—such as a new line of credit with a second mortgage—may trigger a loss of points.

Fourth, you may lose points if you open up a new credit card account or someone else checks your credit report when you open a bank account or even buy a car with cash. These are considered “hard inquiries.” However, if you make your own inquiry by asking for your free annual credit report, this is a “soft” request and will not impact your score.

Finally, the longer you have a solid repayment history, the higher your credit score. A good current credit history of several decades may be considered and any closed accounts in good standing will remain on your credit report for 10 years. On the other hand, one late payment could hurt your score for up to one year, a history of late payments could hurt you for up to three years, and a bankruptcy can hurt you for seven years.

We all would like a credit score above 800, but for many, this is not possible. You will lower your borrowing costs or make a new credit card more obtainable for every 20-point improvement in your credit score. For more information, go to http://www.myfico.com/crediteducation/whatsinyourscore.aspx.


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