I’m Fixing a Hole Where the Rain Gets In
By: Lisa Donovan
I have never been good at numbers. And to top off my inability to understand basic arithmetic, I have a horrible relationship with money. I relied way too heavily on credit cards after college and I have paid way too many fees for being behind on payments or late with arrangements made. This wasn't by choice, mind you. It was a combination of making a few bad decisions and, simultaneously being thrown a few curves balls that set us back quite a bit. After two years of being in complete survival mode we are finally on the road to better times (we have actually managed to become artists with a steady paycheck and 401k plan! Imagine that!).
We have a golden opportunity right now to pick up the pieces of the last two years and try to make good. But how? When you have spent so long just trying to figure out how to buy groceries and letting all the other expenses fall by the wayside, it is a very difficult (albeit, exciting) task to try to figure out where and how to begin. Since I feel like we are exceptionally good, now, at living within our means and following a budget, my concern and worry lies with our credit score and history. There's a lot to learn about this very efficaciously controlling score - it can mean everything for your future financial strategy and security. I have a lot of reason to be concerned - two years of letting credit cards go unpaid off and on, high medical bills from our daughter's emergency lobectomy/week long hospitalization, late car payments and late utility payments can ruin all chances of being able to buy a home or secure any type of low interest low for a very, very long time.
In order to slay the beast that is my credit rating, I suppose the first step is understanding what exactly I am up against. What exactly is a credit score composed of and how do I get it back to being pretty? The best breakdown I have found is as follows:
The number itself can range from 300 to 900. The formula for exactly how the score is calculated is proprietary information and owned by Fair Isaac. Here, however, is an approximate breakdown of how it is determined:
- 35% of the score is based on your payment history. This makes sense since one of the primary reasons a lender wants to see the score is to find out if (and how timely) you pay your bills. The score is affected by how many bills have been paid late, how many were sent out for collection, any bankruptcies, etc. When these things happened also comes into play. The more recent, the worse it will be for your overall score.
- 30% of the score is based on outstanding debt. How much do you owe on car or home loans? How many credit cards do you have that are at their credit limits? The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits.
- 15% of the score is based on the length of time you've had credit. The longer you've had established credit, the better it is for your overall credit score. Why? Because more information about your past payment history gives a more accurate prediction of your future actions.
- 10% of the score is based on the number of inquiries on your report. If you've applied for a lot of credit cards or loans, you will have a lot of inquiries on your credit report. These are bad for your score because they indicate that you may be in some kind of financial trouble or may be taking on a lot of debt (even if you haven't used the cards or gotten the loans). The more recent these inquiries are, the worse for your credit score. FICO scores only count inquiries from the past year.
- 10% of the score is based on the types of credit you currently have. The number of loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you shouldn't have. These actually come more into play if there isn't as much other information on your credit report on which to base the score.
Ok. Now that I have some kind of idea what I am up against, I can devise somewhat of a plan. It seems like the first step is to pay off any balances that are low enough to wipe out in a month or two - then to move on to the bigger balances. Secondly, I should avoid any unnecessary taps on my account. That includes rental applications - that could be just as damaging as a late bill. Other advice I have been given, in regard to cleaning up a credit score, is to note any changes (payoffs or timely payments made) that are not reflected on the credit report. I have heard of plenty of people paying off a balance and it not being noted on the credit report at all. The tricky thing (from what I can gather, and from what I am told by others with much more experience with this than me) is that when you make a late payment or miss a payment, it is immediately reported on your report. However, positive changes make take as long as six months to be noted on your account. This is just one of those thoughtless glitches in the system that you have to be aware of. Your best bet (so I was told by Marketplace on APM) is to take advantage of your free annual credit report and notify the Consumer reporting company of the inaccuracy. The troubled account might take seven years to be forever gone from your report, but it should be noted (and those precious points should be subtracted) that you paid if off in full. This will help you keep on top of the score and give you a better insight into what you have to manage. So, that will be something I will be looking into as well.
While it seems like an unmountable task, I think if I just pay close enough attention to getting things paid on time and paid off, then I might just have this mess cleaned up within this year.
There is a lot of conflicting information out there, but if you go to the most reliable of sources like the FTC, you should be able to have most of your questions answered.