People have three credit scores and a FICO credit score. While the sources and data may vary, all scores use the same scale of measurement. A score of 620 is very poor and may result in being rejected for a loan. A score of 760 or higher is good enough to qualify for the best interest rates. Chances are, your score falls somewhere in between. Part of planning for a major purchase is getting your score as high as you can before applying for credit.
Obtaining a Credit Report and Credit Scores
While there are many free or inexpensive web services used to check credit scores, it is worthwhile to check several of them including myFICO.com. Each credit report and score may reveal different information. Credit reports give specific information about long forgotten bills, late payments and unpaid balances on old accounts.
Pay off Debts
It is important to pay off old bills. Old medical bills, only partially covered by insurance are among the most common unpaid debts that impact credit. Old unpaid utilities can also show up. Check with hospitals, medical offices and utility companies you’ve done business with in the last 7 years to insure that your accounts are settled.
Paying Bills on Time
It is never too late to turn over a new leaf. Start paying all bills before their due dates. This is crucial for credit cards and loans, but also advantageous for utilities and medical bills.
Pay Down Credit Cards
Pay off debts as much as possible. Pay off credit cards, and keep them paid each month but don’t close the accounts, simply pay off the balance. Do not consolidate all credit card debt under one account. Spread them out so that no card is near the max.
A Reprieve in 7 Years
Almost all credit entries, including accounts that have gone to collections, will disappear after 7 years. Even bankruptcy only appears on the report for 10 years. Occasionally though, credit reports do contain older records, due to some bookkeeping oversight. One can ask the credit score company, in writing, to please remove entries that are over 7 years old. People can also challenge any false information or errors found in their reports.
Pay off other Cars and Homes if Possible
The fewer large monthly payments a borrower has, the more they can borrow and the better the loan looks to a lender. It is also hard to get a loan if you have recently obtained loans for other big-ticket items. It is difficult for most people to make many large payments each month and so most lenders see this as a red flag.
Credit and Credit Cards
Credit cards can be either an asset or a liability to good credit. The best policy is to avoid maintaining a balance at all. Paying off a credit card by the end of each month can result in rewards and great credit scores. Paying late or maintaining a large balance can ruin credit scores
By the Numbers
Credit Scores are all about numbers. One very magical number for credit cards is the number 30 percent. It is best to keep all credit card balances below 30 percent of the credit limit, even if you pay it off each month. Don’t bother to cancel old cards, just use them for small purchases occasionally and pay them off before the end of the month. Old accounts that are still active look good on a credit report.
Another important number is 35 percent. Your mortgage payment should be no more than 35 percent of income minus all monthly credit payments. This includes car payments, minimum credit card payments, other mortgages and personal loans.
Keep Scores Good With a Shorter-Term Loan
Shorter-term loans offer lower rates and great savings. Early payoffs also look great on credit scores. It is possible to save over $100,000 with a 15-year mortgage instead of a 30 year. Lower rates plus fewer payments can add up to big savings on any loan.
Finding a Balance to Maintain Good Credit Scores
Numbers are not everything though. Good credit is an ongoing process. It is equally important to find a good personal balance of payments to avoid financial problems. Credit can be a useful tool to some, but a harsh taskmaster to others. If it is too confusing or expensive to deal with six credit cards, two car payments and a mortgage, pay some things off before getting more debt.