The most important number
The saying goes something like this: It’s not whether you win or lose, but how you play the game. Maybe, but your credit score means a lot. Get failing grades in school and you’ll flunk out. Get too few hits in major-league baseball and you’ll be sent down to a farm team. Get too low a credit score and you’ll have difficulty obtaining loans for such things as a car, a house and a college education.
Thankfully, you can easily find out what your credit score is and make changes to improve it.
Video: How to Improve Your Credit
The higher, the better
Information collected about you from credit applications and credit reports include:
- Your bill-paying history.
- The number and type of accounts you have.
- The age of your accounts.
- Outstanding debt.
- Collection actions against you.
A formula enables credit bureaus to add or subtract points for each variable. The total number of points, your credit score, tells creditors how big of a risk they would be taking by lending you money. The higher your credit score, the better.
Checking it for free
Federal law gives you the right to obtain your credit report and credit score from each of the three major credit bureaus -- Equifax, Experian and TransUnion -- once every year, free of charge. You can request your reports from all three at once by starting with the website of the U.S. Federal Trade Commission (FTC). It’s wise to compare reports from all three, because each company’s methodology can be different from the others’ and lead to slightly different scores.
Finding and fixing errors
You may find errors or omissions, which could result in your being denied credit. If so, contact the credit bureau in writing, identifying the problem, stating the facts and requesting that the information be updated. Send your letter by certified mail. The companies are required respond quickly -- usually within a month. When a change is made, the company must send you a free copy of your report. If you ask – and you should do so -- the company must send the new information to anyone who received your credit report over the past six months. Follow up. Be sure the corrections are passed on to your creditors.
Problems with checking too often
There can be a downside to inquiries. If you make too many, your creditors can start to believe that you’re nervous. Perhaps you’ve taken on excessive credit card debt. Maybe you’ve missed a mortgage payment or are in some other kind of money trouble. Frequent inquiries can lower your credit score. It’s good to review your credit reports from all three credit bureaus annually, and definitely before you apply for a big loan, but not more than that.
Video: Taking Out a Loan Can Improve Your Credit Score
Problems with closing accounts
Many financial advisors tell their clients to cut up some credit cards and close unneeded accounts. Generally, that’s smart. However, in some cases, closing an account can lower your credit score. Old cards may represent a long history of prompt bill payment. You can toss cards that you know you’ll never use again to help prevent identity theft, but keep the cards you've had for a long time and show that you’re a reliable borrower.
Adding new information
Be sure to convey any changes in your location or marital status. If you've moved or changed names, write to your creditors and tell them. If your monthly statement doesn’t reach you at your new address, you could miss a payment, and inadvertent lapse will no doubt find its way to your credit report. If you change names and forget to tell your creditors, all your hard work in maintaining a good credit history could go down the drain. It could even be seen as attempted fraud.