Show of hands: Who’s as ecstatic as I am that winter’s over? Even though New Year’s gets all the hype for resolutions and setting goals, I think the beginning of spring is the perfect time to hit the reset button and start anew.
One of my favorite parts of spring is taking care of much-needed work at my house. Well, for the sake of full disclosure, most of the home improvement projects I’m planning will be delegated to my husband or to actual professionals. Trust me, it’s for the best.
If you’re like me and planning significant home improvements for spring, you’re probably also looking for financing to help pay for these projects. Before you start applying for loans, take the time to check out your credit report and credit score. Knowing your credit score gives you leverage to obtain the best available loan rates.
Here’s a little information to help you understand your credit score and, in the spirit of spring improvements, learn how to make your score even better.
How Is a Credit Score Calculated?
Before I worked at a financial institution, I didn’t realize the impact credit scores have on our lives. Credit scores are used in more ways than many of us realize: lenders, insurance companies, employers, landlords and many others use your credit score to determine what services they offer you and how much you pay for them.
The most commonly used credit score, your FICO score, is generated by the three major credit bureaus (Experian, TransUnion and Equifax), and is based on information in your credit report. Credit scores range from 300 to 850 (the higher your score, the better), and are the result of five basic factors:
1. Your loan payment history
2. Your loan balances
3. The length of time your accounts have been open
4. The types of credit you’re using (e.g., credit cards, a mortgage)
5. How many credit accounts you’ve opened recently
One rumor people have asked me about is whether things like your address or marital status have any bearing on your credit score. I can assure you that factors such as your race, religion, national origin, gender, address and marital status have absolutely no impact on your score.
What Hurts Your Credit Score?
Although some of these seem pretty obvious — for example, don’t make late payments — other factors that negatively impact your credit score are a bit trickier.
• Late payments. Hopefully you already know this, but it bears repeating: Pay your bills on time! Keep in mind that it takes about 24 months to restore damaged credit from late payments. Even cell phone and utility companies report delinquent and charged-off accounts to credit bureaus, so be sure you’re paying all your bills promptly. If you’re struggling with your payments, contact your financial institution or the company you’re having a hard time paying right away to talk about your options.
• Derogatory information. Some information, such as bankruptcy filings, can remain on your credit report for up to seven years and impact your credit score the entire time.
• Credit cards with no availability. If your credit cards are maxed out, meaning their balances are at their maximum credit limits, this can lower your score.
• Closing revolving accounts with long-time history. A revolving account is any line of credit, such as a credit card or home equity line of credit. Closing a revolving account you’ve had for a number of years reduces the history of your accounts and also lowers available credit limits, both factors that can negatively impact your credit score.
What Helps Your Credit Score?
Even if your credit score’s not great right now, there are lots of ways you can work toward improving it. Here are a few ideas to get you started:
• Pay your bills on time and bring any delinquent loans current. Be sure to pay all your bills when they’re due. If you can’t make your payments, don’t ignore them. Get in touch with your creditors or with a trustworthy credit counseling agency to figure out a payment plan.
• Pay down or pay off credit cards, but don’t close them. Having available credit on your credit lines will help increase your credit score.
• Check your credit report at least once a year at www.AnnualCreditReport.com. You can get a free credit report from each of the three major credit bureaus annually, but you typically have to pay to get your credit score. Be sure all the information in your credit report is accurate and dispute anything that’s not.
If credit scores still seem confusing, don’t worry! There are lots of resources to help you. I recommend getting in touch with your financial institution, checking out the Federal Reserve’s website (www.federalreserve.gov/creditreports) and visiting AnnualCreditReport.com to find out more.