Last month you gained an understanding of the factors in determining your credit score. Now we’ll focus on how often your score changes, credit repair, when to pay off debt, and potential credit effects.
How often do credit scores change?
Credit scores can change once a week for some and not at all for months (or even longer) for others. It usually takes specific changes to your credit information for your score to move, and once these changes occur, it could take some time for your credit report to reflect your new status. Due to this fact, you may want to consider tracking your credit score over longer periods of time.
How your credit score reacts when you open a new account is a great example of how scores can change in the short-term versus the long-term. When you open a new line of credit, a few immediate changes are usually made to your credit report. Most instantly, a new hard inquiry will probably be added to your report, and your average age of credit history could drop. Due to these factors, opening a new account is likely to drop your credit score in the short-term. However, as you begin to diligently pay off your bills, the additional on-time payments, the higher number of total accounts and your now-growing age of credit history will likely outweigh the initial downsides, and your score can benefit in the long-term.
If you’ve made prior credit mistakes and are working on repairing your credit, you may experience an initial bout of frustration as you loyally pay your bills off and rack up on-time payments only to see little or no change in your score. When in this situation, keep your long-term credit health in mind. While you might not see instant benefits with each paid-off bill, it’s likely that you’ll reap the benefits of your efforts in the long run.
How often should I check my score?
Since it might take months or years to see substantial growth, it’s natural to wonder how often you should check your score. While any short-term changes should be taken with a grain of salt, it’s still wise to check your credit on a weekly or monthly basis. Regularly check your credit score and report to make sure no large changes have occurred that you’re unaware of, to ensure the security and accuracy of your financial information and to keep an eye out for long-term trends. And if your score drops a few points, you may want to wait a few weeks before you jump to any conclusions. Keep making good moves and your score could bounce back before you know it.
Credit Repair
Remember to leave accounts open (even if they are paid off) because for some strange reason the system penalizes you for closing the credit “availability”. If you have poor credit get your credit cards current (do not close the account; leave a zero balance)
If you have no credit and your score won’t allow you to get any credit here is some advice on how to make your score increase in 1-2 years. You can go to your local bank (most banks will do this) ask them if you can get a secured credit card. What this means is you give the bank 1,000.00, 500.00 or even $300 to open a Savings Account – ask them if they will in return give you a credit card for that amount. You cannot take your money out of the savings – however, you have now opened up a credit card account and if you pay on time your score will increase. The bonus is that in one year if you’re never late they will send you the money you put in that savings account. So, now you have the money you put in the savings to use and you have an unsecured credit card. I don’t believe that the amount you open the secured “savings account” really matters. What creditors or merchants want to see is that you have paid on time.
My advice is to get 3 different types of “credit” that are active and you pay them on time. Keeping your balance under 50% of the original amount that you placed in savings (to open the account) will help your score more. Ideally, keeping them under 30% of what your original (deposit to open the account) amount of credit is the best way to move that score up.
Lagniappe
A merchant that sells a washer or dryer for example, will often let you pay 30% to 50% of the purchase price and finance the balance even with poor credit. (Do not make a deal with the merchant unless they tell you that despite your credit they will honor the agreement to allow you to pay the 30’% or 50% down. It’s extremely important that you make sure they first make reports to the credit agencies because some do not. In short, make them an offer, see if they accept and then make certain that they will report your payments and it will show on your credit file. I had preexisting credit debt and found that current accounts being paid seem to be best path to increase your score. Your credit information needs to show you making payments and never being late!
Here are a few things you can try right now to help boost your credit health:
- Ask for a higher credit limit.
- Possible benefit – Could lower your credit card utilization.
- Tactic – Most credit card companies periodically review credit limits, but if it’s been a while since you’ve received a credit limit increase and you have an excellent record, you could try requesting one. Calling up your credit card company might seem like a daunting task, but if it could help your credit health, why not give it a shot?
- Watch out for – Sometimes, credit limit increase requests can come with a new hard inquiry of your credit report, which could initially have a negative impact your score. Make sure to ask first if this will happen so that you know what to expect and can decide if you’d still like to go through with your request.
- Write a “goodwill adjustment letter” for a past late payment.
- Possible benefit – May remove a late payment from an otherwise good-looking credit report.
- Tactic – If you’ve recently made a late bill payment when you’re ordinarily on top of things, you could try asking to have that one black mark removed. In your letter, make a case for why the delinquency should be removed. Generally, you should describe briefly what happened, show what a loyal customer you’ve been and point to your positive track record before and after the misstep. Wait about 30 days before following up, if you haven’t heard anything.
- Watch out for – Remember that your credit card company or lender doesn’t have to remove the delinquency, so be prepared to wait until it eventually falls off of your report.
- Make a plan to pay down your credit card debt at a faster rate.
- Possible benefit – Could lower your credit card utilization and reduce interest fees.
- Tactic – If you tend to carry balances on your credit cards from month to month, consider working out a plan to pay down your debts faster so you can get your credit card utilization rate to lower than 30 percent (the rate that credit experts generally recommend you stay under).
- Watch out for – While you’re working on lowering your balances, try not to rely too heavily on your credit cards if possible. Otherwise, you could end up reversing all of your hard repayment work with new spending.
Lagniappe
You can easily check your credit card utilization rate for free on credit reporting sites such as Credit Karma to see where you stand. Work on the cards reporting more than 30 percent first. If you’ve only been making the minimum payments on those cards and are able to afford it, it’s a good idea to increase your payment amounts so you can steadily decrease your utilization rate. If you can pay your whole bill amount, then you can avoid interest charges as well.
- Transfer your credit card balances.
- Possible benefit – May strengthen your debt pay-off plan and increase your total number of accounts.
- Tactic – When you have lots of different credit cards with varying balances to pay off, making multiple payments each month can seem tricky. There are several cards that offer introductory balance transfer rates, meaning if you transfer all or some of your other cards’ balances, you’ll pay little or no interest on those transferred balances for an introductory period (often a year or two). These promotions vary by card and usually come with a one-time fee, so always review the terms carefully.
- Watch out for – In most cases, if you don’t pay off your balance transfer completely during the introductory period, you’ll have to pay interest on the entire transferred amount when that period is up. So this tactic is generally good for you only if you’re really ready to pay off your credit card debt during the introductory period.
- Dispute credit report errors.
- Possible benefit – Should result in a more accurate record of your credit history.
- Tactic – While some credit report errors don’t affect your credit score at all (like inaccuracies in your personal information), others could severely impact your ability to get approved for credit (like inaccurately reported derogatory marks). Cleaning up errors from your credit report should be a top priority.
- Watch out for – While some credit repair companies will tell you they can remove all negative information from your credit report through this process, that’s often not the case. Accurate negative items on your report cannot typically be removed. Before you hire a company to help you dispute your credit report errors, read through these resources from the Consumer Financial Protection Bureau and the Federal Trade Commission.
When should I pay off my credit card?
Ideally, you should be making regular purchases on your card every month, and then paying off the balance in full on every statement. There is no need to pay your cards back more frequently than once a month, since you’ll normally only be charged interest if a balance from the previous statement remains on your card after that statement’s payment is due. However, making multiple payments a month could be beneficial, as it may help lower your credit utilization rate.
By using your cards and paying the full statement balance each month, you’re still demonstrating that you’re able to responsibly borrow money. You borrowed for the entire month and paid it right back!
Many people believe that you need to carry over a balance from month to month on your cards in order to build credit, but it isn’t true. This myth is particularly harmful for those of us who are working to build our credit. We often have higher interest rates because our credit history, or lack thereof, makes us look like riskier borrowers. As a result, carrying a balance can cost more money, since interest is generally calculated on the statement balance remaining after your monthly payment is made.
Potential Credit Effects
The other consideration you want to make when paying your credit cards back is monitoring your reported overall credit card usage. Your credit card utilization refers to how much of your available credit card limits you use per month. It’s generally recommended to keep your overall credit utilization below 30 percent. However, this does not mean that lower is always better. If your reported credit utilization is consistently 0 percent, lenders who pull your information may not feel confident that you’re able to borrow and repay money because your credit report doesn’t show that you have been.
So when you’re paying back your full credit card balances every month, it is valuable to keep track of when your lender generally reports to the credit bureaus. By doing this, you can make a point to have a balance at the time they report. This helps ensure that you get your due credit for responsible, interest-free, month-to-month borrowing. You deserve it.
Alternatively, if you currently have a higher credit card utilization that you are not able to pay back every month, you could try paying down your cards to under 30 percent at the time your lender reports, even if they will need to fluctuate back up afterwards. This can help establish a record of stable and manageable debt, even as you continue to work at paying down your balances.
But how do you keep track of when your lenders are reporting your information? Normally, your full credit report includes your lenders’ “last reported” date. If you connect your online accounts, you can also check your statement dates and payment due dates for connected accounts
In a world of instant gratification, it’s natural to want a better credit score right now. Unfortunately, that’s not how credit scores work. Your scores depict an overall picture of your financial health and habits, and it takes time to prove your discipline. Stay patient, and you may move up the credit ladder over time. Just like physical health, there’s no fast lane to an excellent credit score. It’s a long-term journey. But just as you can start making healthy diet and exercise choices today, you can do the same for your credit.
Thus far, I’ve shared the importance of saving money to assist with getting started on the road to financial freedom, living within means without feeling too restricted, the importance of your credit score, and the factors that can impact your score. Next month we’ll focus on budgeting.
