Wells Fargo recently announced it would no longer offer personal lines of credit. Instead, customers with account balances will be required to begin a payoff schedule. The typical open line-of-credit might be for as little as $3,000 or as much as $100,000. These accounts were used for such things as home improvements or loan consolidations. The account owner could access funds on demand and, after paying monthly interest, could make repayments at their choosing while maintaining access to any unused portion of the line of credit.
For Wells Fargo customers, in addition to the inconvenience of paying off and closing their line-of-credit, their FICO credit score could also be negatively impacted. This has to do with what the credit bureaus call ‘credit utilization’. Credit utilization is defined by how much of your available credit you are currently using (utilizing). For example, if you have $10,000 of credit available to you and your current outstanding loans are $4,500, your credit utilization is 45%. According to Experian, ideally, your credit utilization should not exceed 30%. Above that, your credit score can be hurt significantly. Further, according to FICO, consumers with scores of 800 or higher have an average credit utilization of 7%.
Whether you are a Wells Fargo customer or not, now is an excellent time to review three tips for improving your credit score:
- Request higher credit limits. Review your available credit limits and determine your current and typical credit utilization. An ideal target might be 10% of loans based on total credit. Ask your existing lender if they can raise your credit limit without making a ‘hard’ inquiry…a formal review. Hard inquiries will often drop your score a few points for a short period. A little-known tip is to keep credit cards open instead of closing ones you rarely use. This helps maintain your higher credit limit.
- Pay bills on time. Nothing will kill a credit score quicker than late payments. A little-known tip for credit card users is to make payments ‘during the month.’ This will reduce credit utilization. This can easily be done online in a few minutes by linking your bank account and your credit card account.
- Dispute errors on your credit report. Mistakes can happen, and your best defense is to take advantage of your opportunity to get a free credit report every 12 months and review it for errors. If you find an error, the credit bureaus have a formal process for filing for a correction. The three dominant credit bureaus are Experian, TransUnion, and Equifax. For your free reports, visit www.annualcreditreport.com. I recently pulled up my three credit reports online and reviewed them in less than 30 minutes.
Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including 50 Rules of Success; J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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