Reader’s Question: I recently requested and received a copy of my credit report from Transunion. They gave me four reasons why my credit needed addressing. I have a Home Equity Line of Credit that is set up for ‘interest-only’ payments until it balloons in 2018. Transunion stated, "The amount paid on this loan is too low." When I called to ask what amount or percent of principal should I be paying each month to satisfy their model their answer was, "We can’t tell you." They also stated that my credit card balances were too high in relation to my limits. When I asked them what the appropriate outstanding balance as a percent of my limit should be to raise my score their answer was…”We can’t tell you!” Why all the secrecy? You’d think they’d want you to know. R.D.
Answer: Apparently the credit agencies feel they need to keep how they score credit a big secret so people won’t ‘game’ the system. It doesn’t seem perfectly logical when, if by knowing how to improve one’s credit, it caused folks to make better financial decisions. While credit scoring is a big frustrating secret, here are some guidelines everyone can use to improve your credit score:
- Order your credit reports from each agency: Transunion, Experian and Equifax. Once a year you can get a free report at www.annualcreditreport.com. These credit reports show your credit history not your score. The first thing you want to do is make certain there are no errors. If there are, contact that agency and have them corrected. This could immediately improve your score.
- Get your credit score. If you’re going to improve your credit score, you need to know your current score. Beware of free credit score offers. I searched all over the Internet and finally chose www.Equifax.com where they offer a very detailed report as part of a free 30-day trial. If you don’t cancel, after thirty days you’ll be charged $16.95 per month for a credit monitoring service. According to Equifax, scoring is as follows: Poor 280-559; fair 560-659; good 660-724; very good 725-759; excellent 760-850.
- Pay your bills on time. This may seem obvious, but nothing will hurt your credit score faster than late payments. One strategy is to set your recurring bills such as utility and phone bills on auto payment directly from your checking account. Just be sure you always have enough cash or set up over-draft protection. Others can be automatically charged to your credit card.
- Get a credit card and an installment loan. Surprising to some folks, you actually have to have and use credit in order to get a good credit score. A short credit history will hurt your score so the sooner you get started the better. Credit scoring companies like to see a nice mix of types of credit including credit cards, installment loans such as car payment and possibly a home mortgage.
- Underutilize your credit. If your credit card limit is $10,000, try to keep both your charges and balances under $3,000 or 30%. 10% or less is even better. Credit scoring companies like to see a wide gap between your limit and how much you charge. Opening a lot of low-limit charge accounts or credit cards will hurt your score so open only what you’ll need. I have three credit cards, all with high limits: one for direct business purchases; one for deductible purchases and one for personal purchases. Transferring balances and consolidating cards may also hurt your score.
Be sure to monitor your credit history as well as your credit score on at least an annual basis.
A final note to our reader, R.D. Regarding Transunion’s comments about your home equity line of credit payment being too low… their ‘computer’ doesn’t know your loan is a low-interest, interest-only loan (a great loan based on being a great credit risk), only that your payments are very low compared to your balance, thus it’s hurting your credit score. Go figure!