Thursday, September 19, 2013

The Credit Score: Part 2 of 2

We've already talked about what the credit score is and why it's important. Now let's get to the "what do I do about it?"

Notebook image from freedigitalphotos.net

Step 1: Get Your Credit Report

The credit report lists all your credit accounts, amounts of debt, if you pay on time, etc. You can get a free copy of this annually from each of the three reporting agencies (Equifax, TransUnion, and Experian). If you feel a strong need to pay for one of those credit watch services that gives you monthly updates, then do what you feel comfortable with.

But here's what I do. Since you get three free credit reports, I have three reminders in my Google calendar that repeat every year.

  • February 1: Check Experian credit report
  • June 1: Check TransUnion credit report
  • October 1: Check Equifax credit report
That way, I get decent coverage throughout the year, and it's free. Get your reports from here. If you're suspicious about giving your SSN online, you can do some due diligence here.

I know my dates are off from what I wrote above. My personal system has me checking Experian on January 1, but I thought you all would appreciate taking New Year's off, so I bumped everything back a month. You're welcome.

Step 2: Make Sure Your Credit Report is Right
Great! You got your report. You're looking through it, and everything looks great, except HUH!?!? Fortunately, I've never had this happen to me. But this site will give you some good pointers on next steps.

Step 3: Know Your Credit Score
It's hard to improve something if you don't even know where you're at currently. Your credit score is there, whether or not you check it. Knowing what it is can only help. The credit reports (the information that goes into your score) are free once a year. The score you have to pay for (about $20 for each person-- you and your spouse have individual scores). You can buy it here. Since I check my credit report from each of the three reporting agencies annually, I just buy my score from one reporting agency annually and rotate through the three every three years. (Again, just telling you what I do-- different people have different opinions. But regular checking at any frequency is going to put you ahead of most people.) I personally don't see much of a need to sign up for the monthly monitoring services. So if that's not something you want to do, make sure you don't sign up for a "free credit score with monthly credit monitoring subscription." The link I included is just to straight up buy the credit score with no strings attached.

Also, thanks to readers for pointing out creditkarma.com, which offers free credit monitoring and credit scores (similar business model to mint.com which is also a free, reliable service). 20somethingfinance.com has a pretty solid review of it. I think this type of service would be great to use in conjunction with pulling the actual credit reports from the link I listed above, just to get the primary source, occasionally.

Step 4: Improve Your Credit Score
Remember the components of your credit score from last week?


Let's talk about how to beef up each of these. myfico.com has some great tips, which I've summarized here. Click the link for more details.
  • Payment History: Make those payments on time! My favorite method is to set up an automatic payment or use bill pay, but make sure you're going to have the cash in your account for this to work. Another option is to just have an automated reminder.
  • Amount of Debt: See Lisa's post on tips to pay down debt. 
  • New Credit: If you're loan shopping, try to do it over a more limited span of time, so that the FICO score people can figure out that those related credit inquiries are due to one loan, and not several spread out over the course of a year.
  • Credit Mix: If you don't have any credit cards (and you can manage them responsibly), I'd go ahead and open one. (Post to come about selecting credit cards.) Personally, I have two credit cards. You don't need to acquire an arsenal of them-- that makes it hard to keep track of things. Installment loans can also contribute to your FICO score. This is a personal decision, of course, but even if you have cash to pay for a car, you may consider taking out a small loan to add an installment loan to your mix if you don't have one on your report already. For some people, though, they'd rather just pay cash straight up if they have it, and that's fine-- go with what works in your situation.
  • Credit History Length: Similar to the credit mix advice, if you've never gotten any credit in your life, (and you're going to be prudent about it), I'd get a credit card and make some small monthly purchase on it so you start establishing some credit. (I'm not saying this like those people who try to dupe college students into signing up for a credit card and then the students end up smothered in debt before they graduate.) I'm saying when you get a credit card, treat it like cash-- not free money. Pay it off every month in full. If you have accounts you want to close, consider keeping them open to increase the average age of your accounts. I have a card that I don't like much-- but I use it to pay my Netflix account every month and have an automatic payment set up. I never use the card for anything else.
Phew. I'm glad I split this post into two because this was already super long.

Tell us-- Have you learned any tips or tricks about credit scores you want to share?






14 comments:

  1. You've inspired me. I love the Google Calendar reminders idea - a real solution that will work for me!

    ReplyDelete
    Replies
    1. Woohoo! It's all about the Google Calendar... otherwise it's sort of a pain to remember to check it every four months/which ones you've checked recently.

      Delete
  2. Lauren, this is an incredible article. Totally adding this to my to do list. It wasn't until after my husband and I got married and we pulled our credit report did we discover a small ER bill hadn't been paid years before and it was hurting his credit (he was serving a church mission at the time and his parents thought they paid it).

    ReplyDelete
    Replies
    1. Thanks! That's a really good example of checking. I forgot to add that you could probably put a google reminder in to check your actual score as well, but Aaron and I usually remember this one, because we have an ongoing competition to see who has the highest score. (He always wins because he got a few years headstart on me.)

      Delete
    2. Just had to say that I just set up my google alerts! Kind of excited to pull our first credit report Oct 1st *said in nerdiest voice possible*

      Delete
  3. You can sign up for creditkarma.com and creditsesame.com (I think they are both .com?) for free, and you can see two of your credit scores. Also, they monitor for free, so you can get alerts for when it changes. Perhaps you know something I don't about using these sites, but I've appreciated being able to see the number for free.

    ReplyDelete
    Replies
    1. I hadn't heard of these before-- they look really interesting. Maybe I'll write a post about them. Thanks for sharing!

      Delete
    2. I use creditkarma.com too. It has been great for keeping track of my score while my husband and I went through the mortgage loan process. You can check as often as you like, and they email you when significant changes happen (like hard checks). They generally use Experian. From what I've heard, that is generally the average of your three scores. They also have a unique scoring system which discounts the longevity of your credit history, because seriously, you shouldn't be punished for having good credit for only 5 years. They also offer personalized suggestions for improving your credit score based on how your credit is used, and there is a credit calculator to simulate what will happen if you pay off or get more loans. I love it!

      Delete
  4. I might have missed something but I'm curious, why do you buy your credit score when you already get 3 free throughout the year? Is that something different or is there a benefit to doing that?

    ReplyDelete
    Replies
    1. The 3 free ones you get are the credit reports-- those are the ones that tell you the data that goes into your score, like which debt accounts you have/had, their amounts, and if you made your payments on time (here's a link to a sample one: http://www.experian.com/credit_report_basics/pdf/samplecreditreport.pdf). But the free ones don't tell you your actual score. I think the most important part is making sure that all the information on the report is accurate, but after that, if you want to know where you stand with your actual credit score (like are you a 630 or a 740?), you've got to pay for that. Although, it sounds like some sites like creditkarma.com offer a simulated (not your exact FICO score, but close enough) score for free.

      Delete
    2. And by "close enough," I should add the caveat that I think the variance between actual and simulated score is bigger for some people than others, from what I've heard.

      Delete
  5. I heard once that putting your name on the utility bills increases your credit score. I have been doing that foe the last two to three years. I think it has helped because I don't have very much debt otherwise. Just student loans and a car payment as a cosigner.

    ReplyDelete
  6. I heard once that putting your name on the utility bills increases your credit score. I have been doing that foe the last two to three years. I think it has helped because I don't have very much debt otherwise. Just student loans and a car payment as a cosigner.

    ReplyDelete
  7. This comment has been removed by a blog administrator.

    ReplyDelete

Related Posts Plugin for WordPress, Blogger...