Improving Credit Scores

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 What is a Credit Report?

A credit report is a detailed record of how an individual has managed their credit over time. It contains information such as what accounts the individual has and has had, the payment history on those accounts, and their credit score.

Lenders use an individual’s credit report and score that results from the data in the report to determine whether to grant the individual credit. If the individual is given credit, their credit report also helps the lender determine what terms to offer the individual.

What is a Credit Score?

A credit score is a number that represents a summary of an individual’s credit history. Most credit scores are produced by Fair, Isaac & Co. (FICO). It is used by many different types of entities when an individual applies for credit or a loan, including:

  • Credit card companies;
  • Home equity lenders;
  • Auto loan lenders; and
  • Finance companies.

If an individual has a low credit score, they may not be able to obtain a loan or credit card. If they are approved for a loan or credit card, they may have to pay a higher interest rate.

What is in My Score?

There is a large amount of data used by FICO in an individual’s credit report. The data used typically falls into 5 categories, listed in order of importance, which include:

  • Payment history, which includes:
    • account payment information;
    • presence of adverse public records;
    • severity of delinquency; and
    • number of past due items on file;
  • Amounts owed, which includes:
    • amount owing on accounts;
    • lack of a specific type of balance;
    • number of accounts with balances; and
    • proportion of credit lines used;
  • Length of credit history, which includes the time since the accounts were opened and the time since there was account activity;
  • New credit, which includes the number of recently opened accounts and the number of recent credit inquiries; and
  • Types of credit used, or the number of various types of accounts.

Each of these categories is taken into consideration. The importance of any one factor depends on the overall information in an individual’s credit report.

An individual’s credit score is determined by considering both the positive and the negative information on their credit report. There are some types of information that are not considered, including:

  • Race;
  • Religion;
  • Age;
  • Salary;
  • Occupation; and
  • Place of residence.

What is a Good Score?

The range of possible credit scores is 300-900. The average credit score is somewhere around 750.

There is a direct correlation between a low credit score and a high default rate. Conversely, as an individual’s credit score improves, their risk of default decreases.

It is important to note that an individual’s credit score may vary from credit bureau to credit bureau. There are 3 main credit bureaus:

  • Equifax;
  • TransUnion; and
  • Experian.

How Can I Improve My Credit Score?

If an individual has a lower credit score, they may be seeking ways to improve that number. There are numerous ways an individual can improve their credit score, including:

  • Paying their bills on time;
  • Updating their old accounts;
  • Not maxing out their credit lines;
  • Limiting the number of times they apply for credit;
  • Maintaining their accounts for a long period of time;
  • Staying away from finance companies;
  • Contacting creditors;
  • Seeing a credit counselor;
  • Keeping balances low on their credit cards;
  • Requesting and checking their credit report at least annually; and
  • Managing their credit cards responsibly.

In many cases, it is easier said than done to avoid maxing out credit lines and managing credit cards responsibly. There are many occasions when individuals face unforeseen circumstances and turn to their credit card to pay unexpected expenses. There is absolutely nothing wrong with seeking help if an individual becomes overwhelmed with their debt and wants to improve their credit score.

Can Credit Cards Help Me Improve my Credit Score?

Yes, it is possible a credit card could help an individual improve their credit score when it is used correctly. A large number of individuals go through their early years without establishing credit and without considering their actions may affect their credit scores and future purchases.

Many individuals do not even consider when or for what they will need a line of credit for in the future. It usually comes to light during a major life event, such as trying to purchase a home by obtaining a mortgage or trying to get a loan for a vehicle.

Many individuals are not aware that the responsible use of credit cards may help them improve their credit score. An individual can obtain a card with a low limit and if they make full regular monthly payments, they will see an improvement in their credit score.

Being debt free is important. However, being debt free does not equal a good credit rating because lenders have no history to examine. If an individual does not start small, such as with utility bills and small credit cards, they may have issues with larger purchases.

It is important to note that each time an individual applies for a credit card, it is noted on their credit report and may cause their score to drop temporarily. Many inquiries in a short period of time may also negatively affect an individual’s credit score.

The majority of credit card companies approve a credit application with the hopes that the individual will never be able to pay off their debt. The company hopes that, like most Americans, the individual will live beyond their means and be required to pay the high interest rates for a long period of time.

Are There Other Ways to Improve my Score?

One of the best ways to improve an individual’s credit score is to pay off their credit card debt. This is one type of debt that actually increases over time.

Many individuals choose to only pay the minimum each month on their credit card bills, subjecting them to interest fees. These fees can have an enormous impact on the total amount they pay over time.

It is important to note that the minimum payment percentage rate that is established by the lender is done to ensure that the individual does not completely pay off their debt for a period of time. The faster an individual is able to pay off their credit card debt, the lesser the amount of fees they will be required to pay.

One part of an individual’s credit score is their debt to credit ratio. This examines how much debt they have in relation to how much credit they have been extended. The lower this ratio, the higher an individual’s score.

How Do I Prevent Bad Credit?

The best way to prevent a bad credit score and to improve a bad credit score is to attempt to pay debts on time. Generally, paying debts not longer than 30 days past due is ideal.

Additionally, an individual may slowly improve bad credit by paying off their debts. Once an individual pays down their debts, they may request their provider to reduce their line of credit. An individual should always avoid opening and closing lines of credit too frequently.

Do I Need a Lawyer Who has Experience with Credit Issues?

Yes, it is essential to have the assistance of an experienced credit lawyer for any credit issues you may have. Your lawyer may be able to assist you in determining a feasible plan to improve your credit score. An attorney may also be able to help you if you believe your credit score is flawed or if there are errors on your credit report.

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