Building your credit

June 3, 2014 

Are you interested in increasing your credit score? There is no silver bullet but you can take steps to improve your credit history and score.

First, understand how the most common credit score, Fair Isaac (FICO) is calculated. The major factors in your score are your payment history and how much debt you carry. Your payment history makes up 35 percent of your score. A single late payment will ding you and stay on your report for two years. A history of payment problems will hurt you even more.

How much debt you carry is worth 30 percent. It is calculated based on your debt as a percentage of your credit limit. For example, if you have charged $1,000 on a credit card with a limit of $3,500, you are at 29 percent of your limit. Staying below 10 percent of your limit will give you the highest score in this area.

The length of time you have a credit history counts 15 percent, having different types of credit counts 10 percent and the number of inquiries counts 10 percent. It pays to have a long history using varied forms of credit such as a mortgage, car loan and credit card.

Now let's look at your history. Go to AnnualCreditReport.com and get a free copy of your credit report from the three major agencies (Equifax, Experian and TransUnion). This is the only free site sponsored by the three agencies. If you want your credit score, there is a charge but you can get this free at CreditKarma.com. There is no need to sign

up for a trial membership or give your credit card information at either of these sites. Check with your bank or credit card company as they may provide your credit score for free.

Once you have your credit report, make sure everything is correct. Look for late payment items, accounts that have been paid and closed that still show as open, accounts that are not yours, incorrect credit inquiries or anything that doesn't look right. If you believe something is incorrect, contact the reporting company's service group listed on the site.

Your history should help you determine if your score is being impacted because of payment problems, length of history, high debt load, multiple inquiries or not having diversified credit. Once you know where you are weakest, here are some ideas on making improvements:

• Pay all your bills on time, for a long time. Even if you can't pay your entire bill, paying at least the minimum on time will help your history. Set up payment reminders to make sure you don't forget when a bill is due. The longer you stay current, the better off you are.

• Keep your credit card balance low. Keeping your balance low relative to your credit limit will help your score. If you find you must use your credit card often, pay off the account throughout the month rather than just when you get the statement. This will keep your balance down.

• No mortgage? Report your rent. Contact the reporting agencies and see how you can have your rent history reported. Some use a third party to report and there may be a charge however, it may be worth it to improve your history. If you rent with others, make sure all pay on time as it will affect your history.

• Put your name on a bill. Make sure you have your name on utility, phone, TV or internet service account. The reporting agencies are considering payment history of these accounts.

• Get in with a bank or credit union. Open an account and start to get to know the people there. You may not need it now but if you want to get a car or other loan in the future it helps to have a relationship.

• Don't sign for others. Don't ask others to co-sign for you and don't do it for others. Co-signing doesn't help your score if payments are late. Better to be responsible for your own credit.

• Have patience. Building a good credit history and score means you must demonstrate good habits over a period of time. The only legitimate quick fix plan is correcting reports. You can do this yourself; you don't need to hire someone to do it for you. Getting results means changing your habits now. This will build a better history that sticks.

If you are having problems making required payments on your accounts contact the companies owed directly. You don't need an agency to do this for you and you may be more effective. You do need to have a plan as to what you can pay and how you will get the account paid. If you need help figuring out your budget or can't get started, seek out a financial planner or credit counseling agency. Just be careful to check out their credentials, what they will do for you and charges before you sign up.

It takes time and effort to improve your credit history and score. It is well worth it when you apply for a loan, insurance or employment. Keep your history polished up.

Tom Roberts, a certified financial planner and owner of A New Approach Financial Planning in Lakewood Ranch and Sarasota, can be reached at (941) 927-9590 or Tom@ANewApproachFP.com.

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