Email Post to a Friend: How to Improve Your Credit

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September
28

Thinking about buying a new home? Great! Your first step should be reviewing your credit report. Your credit report is an important collection of data upon which a mortgage company will base your approval, interest rate, and loan terms.

Naturally, you'll want to ensure your credit is in good standing – the better your credit, the better your chances of receiving favorable interest rates and higher loan amounts. Before we talk improving your credit score, let's make sure you know the basics of pulling your credit report.

Accessing Your Credit Report

Thanks to the Fair Credit Reporting Act, you can order a copy of your credit report without an inquiry affecting your score. Florida and Georgia residents can get one copy of their credit report for free from each of the three major credit bureaus (TransUnion, Equifax, and Experian) every year.

It's important to note, however, that while your free credit report is full of detailed data about your personal credit profile, it doesn't include your credit score – an interpretation of that data which, along with your credit report, your lender will use to determine your creditworthiness. Thankfully, you can easily secure your free credit score from a number of reputable sources, like Discover Credit Scorecard.

Disputing Items on Your Credit Report

You'll want to pay close attention for mistakes when reviewing your credit report. If you discover an error that's negatively impacting your credit, you can dispute it by contacting both the company that provided your report and the company that provided the error on your report.

If you mail a letter, make sure to include detailed information about the error and any additional documents that support your claim that an error was made. The letter needs to include your full name, social security number, and current mailing address.

The company that supplied your report has 30 days to research your dispute. At the end of 30 days, the bureau will send you an updated credit report along with the results of their findings. If they do not respond to the dispute within 30 days, then the error will be removed from your credit.

Disputing items on your credit report can be a timely process, but it can improve your credit score tremendously if some of the negative remarks are removed.

What Impacts Your Credit Score & How to Improve It

There are several other items in addition to errors that affect your credit score, such as:

  • Payment History
  • Trade Line Information
  • Length of Credit History
  • New Credit Inquiries
  • Types of Credit Usage

The exact formula for determining your credit score is not known, but the following approximate percentages, should help give you an idea of the importance of each category. These percentages are based on FICO Score 8, which is the credit score used by most lenders.

Payment history is the biggest factor and accounts for 35% of the score. You should pay your bills in a timely fashion, and never let your late payments extend beyond 30 days.

Credit line information accounts for 30% of the score and includes all of your outstanding debts. Aim to keep your outstanding balances at least 50% below the total credit available for each line of credit you have open. This demonstrates that although you have credit available, you still maintain a conservative approach to your debt.

The length of your credit history accounts for 15% of the score. You should use your credit that you have already established at least once a quarter to keep the account active. Additionally, keep open accounts that you have maintained active for a long time, as these accounts demonstrate that you have maintained a relationship with that institution and paid on-time.

New credit inquiries accounts for 10% of the score. You should keep new inquiries to a minimum and only apply for necessary items. Each inquiry to your credit could lower your score by at least 5 points.

Types of credit accounts for 10% of the score and includes mortgages, installment loans, revolving credit, student loans, and more. Try to keep a reasonable balance between the type of accounts you acquire to avoid having too many of any one type of account.

 

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