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Credit Score 101

Sad but true, in the finance world, we are all just numbers. Perhaps the most important number of them all is our credit score. As such, we should always be aware of what our exact scores are, and how we can improve them. Here is a quick rundown of what credit scores are all about, and how you can get the most out of yours.

What are the main factors that affect your credit score?

– First and foremost, your payment history. The main thing a lender wants to know is how good, or bad, your history is on paying your debts in full, and on time. Your most recent history is what matters, and this will determine the majority of your credit score.

– Second in importance is your outstanding debt. If your credit cards are maxed out, or the balance is high, your credit score will be negatively affected. Keep your balances low, and watch your credit scores go up.

– The length of time you’ve had credit. The longer your credit history, the better your score will be. This is why it is important to not close any old accounts…even if the company made you mad!

– Lastly, the number of inquiries on your credit report. It can often be viewed by lenders that too many inquiries can mean that you are in debt trouble. However, if you are looking to purchase a home or refinance, credit agencies do allow a cushion period for multiple credit runs since they know you are in the market.

How can you improve your credit?

– Know your score. If you don’t know your score, you won’t know how to improve it.

– Pay your bills on time. A good idea would be to set up an automated pay plan through your bank. Paying your bills automatically will eliminate the possibility of you forgetting a due date.

– Pay down credit card debt. While it is always good to pay off your installment loans (mortgage, car, student), you will see a greater boost in your score by paying down credit card debt. Lenders like to see your balances below 30% of the credit limit. Also, keep in mind that generally credit card debts are set at higher interest rates than installment loans, and are therefore, costing you more money.

– Check your limits. Often times, the credit card company will report a lower limit to the agencies than you actually have. Call the credit card companies, and make sure they correct the mistake.

– Start using your old cards. Often times, I hear clients closing their oldest credit card accounts. Whether it was because they finally paid it off, or because the credit card company mistreated them, and in retaliation the client closed the account. If you’ve had a credit card for a long time, don’t close it or stop using it. Remember, the length of your credit history matters. If you stop using the old card, the agencies will stop reporting the accounts. While the accounts will still appear, they will not hold as much weight due to the inactivity.

– Dispute collections. If you had a dispute with a company recently, and it was settled but is still showing up on your report, get it fixed! Dispute the account with the credit agencies, and often times if the balance is small enough, the account will be dropped. However, make sure you only dispute the most recent collections.

Here is a little more info on disputing collections:

http://www.equifax.com/answers/correct-credit-report-errors/en_cp

http://www.experian.com/disputes/faq.html

– Negotiate a payment plan with the collection companies. Be tough, and persistent!!

– Correct any mistakes! Often a mistake can be as simple as a misspelling of your name. Look for mistakes in credit limits, late payments, charge offs, and unpaid accounts.

– Get rewarded for being a good customer. If you’ve been a good customer, you can often call the companies and get that one late payment erased from your credit history. Also, you can ask for an older troubled account to be “re-aged.” If the account is still active, the lender might forgive old lates if you’ve paid on time over the last 12 months or so.

Your credit score is crucial to your financial future. With a little effort, you can help save yourself thousands of dollars in the long run. If you need any help reviewing your credit report, contact me at (562) 972-0351 to set up an appointment, and we can review it together. Also, feel free to check out my website at www.AlissaAlvarez.com for more information.

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