When it comes to finances, there are two important areas where a young person can actually do something that has impact on his or her future. The first is to create a budget (yes, you may groan, but it’s true — and be advised that is not the topic of this post). The second is getting smart about your credit score.
What is a credit score?
A credit score is a numerical expression based on a level analysis of a person’s credit files to represent the creditworthiness of an individual. Lenders such as banks and credit card companies use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate and what credit limits.
Know your score before you share it.
Many people only discover their credit score when they apply for a loan or when they sign up for cellphone service, utilities or cable TV. It’s best to know your score before you actually apply to use it.
There are three main credit reporting agencies: TransUnion, Experian and Equifax. Each of them captures your credit rating slightly differently. It’s smart to be tuned in to each one. You are entitled to a free copy of your credit report annually. Visit annualcreditreport.com to request it from each of the three reporting firms.
I have my credit report — now what?
Like any discipline or specialty, credit has its own “language.” Familiarize yourself with it. For example, you will want to know what’s a good score and where there’s room for improvement. Anything higher than 700 is considered good credit. It will qualify you for more favorable offers and lower interest rates. Looking for a good deal on a car? Start with improving your credit score.
Look for errors or inconsistencies in your report.
You’d be amazed at how often there are mistakes and inconsistencies in credit reports. This is why you need review them carefully and highlight anything that looks questionable. It’s up to you to contact the reporting agency to alert them to the error and ensure that necessary action is taken to update your report. Let them know in writing exactly what is incorrect, state what you believe to be true and include any documentation that will help you support your claim.
Stay on top of your bills.
Another reason to read your report is to see if a long-forgotten or lost bill is causing issues. Say an unpaid balance of a negligible amount on an old bill goes to collection, and you never realize it. Guess what? That little bill may make an unpleasant guest appearance on your credit report. Regularly reviewing your reports can help you tie up loose ends with creditors.
Settle up your debts and renegotiate more favorable terms.
More easily said than done, right? Maybe. It’s best to wipe out old debts, and if you have lots of small ones, take care of those so that you can figure out how to handle the bigger ones. Larger debts need to be paid off based on interest rates (higher interest rate loans are costlier and should be paid off first.) Regardless of what strategy you choose to follow, you’re well advised to contact all of your lenders to see if there is any room to negotiate better terms. People actually want to be paid off, so if you show a good faith effort, you may find that they will settle for a lesser amount.
Keep your balances low and don’t be tempted to raise your credit line.
While you’re developing new habits, consider committing to pay off your balances every month or keep them as low as possible. Also, even if you get the most tantalizing offers to raise your credit line, try to resist the temptation to take them.
Turned down? Find out why you were rejected.
If you are ever declined for a loan, the 2011 Fair Credit Reporting Act gives you the right to ask why. The lender is obligated to respond in writing as to their decision. Find out the specific reasons and take the necessary steps to remedy your situation.
There is a light at the end of the tunnel.
If there’s a takeaway from all this it’s that it is possible to improve your credit score. It will take a combination of more mindful spending and more intentional debt reduction. It will take time, so be patient. The more you pay attention to your credit, the better it will become. You are in the unique position to start your life with good money habits, and even if you have not started out as strong as you’d hoped to, you have lots of time to get back on the right track.
Scott Fehrs is the chief executive officer of Treloar & Heisel, Inc., a premier financial services provider to dental and medical professionals across the country. Treloar & Heisel assists thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice and a strong national network focused on delivering the highest level of service.
All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.
Treloar & Heisel, Inc. does not offer business consulting, tax or legal advice.
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