Your credit score is that all-important three-digit number used by lenders to help them decide whether or not to lend you money and what your interest rate will be. That's why your day-to-day money moves can help or hurt your credit scores.
Learning what lenders see as risky can help you make smarter decisions now and avoid the big mistakes that can damage your scores for years.
|Monitor Your Credit Report and Score|
Check your information regularly by going toAnnualCreditReport.com to request a free credit report once every 12 months from each of the major three reporting agencies, Experian®,Equifax® and TransUnion®. Gail Cunningham with the National Foundation for Credit Counseling recommends making one request every four months from a different bureau to help keep an eye open for identity theft.
You'll have to pay to view your credit scores because they aren't included in the reports. You can get your scores from myFICO.com for about $20. You also can purchase the VantageScore with a free report at annualcreditreport.com. By law, lenders must provide you a credit score for free whenever you apply for credit and are turned down or not approved at the best rate.
Credit-related actions show up on your credit reports, which include records of how you've managed borrowed money and loan repayment in the past. And what's in your report matters to the various scoring models that assess your potential for risk. They look at:
- Your track record of payments.
- How much you owe.
- How long you've had established credit.
- Whether you're taking on new credit.
- The types of credit accounts you have open.
Because payment histories and financial pictures can differ among consumers, it's impossible to predict exactly how much a financial misstep will hurt your score. But, it is possible to categorize bad financial behaviors. And, consumers can catch a break on lesser credit mistakes. From a lender's perspective, there's a big difference between maxing out a credit card (and paying it off on time) and bankruptcy.
Actions and Consequences
Compiled from information provided by Experian, myFico.com and John Ulzheimer from SmartCredit.com, this chart shows the possible consequences of credit-related actions when you're trying to borrow money.
|Applying for a new line of credit, auto loan or student loan||None to mild|
|Single 30-day late bill payment||Mild|
|Multiple credit card issuers requesting your credit report in a 12-month period||Mild to moderate|
|Multiple historical 30-day late payments||Moderate|
|Account sent to collections||Severe|
|High credit-card utilization rate (your balance compared to your credit limits)||Severe|
|Charge-offs, settlements, collections, loan defaults, accounts going 90 days delinquent or worse, a large number of low-level current delinquencies (30 days, 60 days past due)||Severe|
Consequences: Mild = 10- to 60-point reduction; recovery within a year. Moderate = 60- to 100-point reduction; recovery takes more than one year. Severe = 100-point reduction or more; recovery takes two to 10 years, depending on the infraction.
Typically, the higher your score, the bigger hit you'll take with each payment problem, says Anthony Sprauve, spokesman for myFICO.com, the consumer division of FICO, which created the FICO® Score. That's because if your score is low, your past risky credit behavior has already been factored into it.
"So if you've got a modest score and you stumble, your score is not going to drop as much as someone who had a stellar score," explains Sprauve. Despite this difference, he says, there are a few basic things that, if done on a regular basis, should improve a credit score:
- Pay all of your bills on time, every time.
- Keep your credit card balances low.
- Only open new credit when necessary.
How to Raise Your Scores
Changing bad financial behaviors doesn't actually rebuild your credit scores. "You rebuild your credit history, which then is reflected by your credit scores," explains Maxine Sweet, Experian's vice president of public education.
The time it takes to improve your credit history varies. Although late payments remain on your credit report for seven years, generally if you clear all past-due debts and pay on time from then on, your score can begin to recover quickly.
"The further in the rearview mirror bad things are, the less they impact the score," says Sprauve. A single payment that's late by 30 days should stop affecting your score in six to 12 months, if your credit report is otherwise pristine.
"Credit scoring systems reflect patterns of behavior," Sweet says. "It's the habit of not paying on time that will really hurt you, not a rare stumble along the way. If you continue to use credit and demonstrate that you are managing it well, your scores will begin to climb back up."
According to myFico.com, the effects of bankruptcy can be long-lasting. In a Chapter 13 bankruptcy, in which you make partial repayments over a number of years, the black mark can linger for seven to more than 10 years. A Chapter 7 bankruptcy, or total liquidation, can affect your record for 10 years.
Keep That Number High
Once your finances are in order, keep a sharp eye on your credit record.
"Your credit score is based on the contents of your credit report, so start by obtaining your report for free from AnnualCreditReport.com and reviewing it for accuracy," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. A NFCC Financial Literacy survey showed that despite it being free, 65% of respondents had not ordered their credit report in the past 12 months.