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Understanding Credit

The reason many people have a mediocre—or even lousy—credit score is simply because most people have little idea about what actions cause scores to go up or down. The various companies with which you have accounts report to the bureaus (TransUnion, Experian, and Equifax) every 30 days. Of course, the bureaus want to see that you pay your bills on time, but they also want to see that there is a wide variety of credit available to you. The credit scale runs from 300 to 850. Anything over 700 is decent. Most people hover between 450 and 650. Everyone is allowed one free credit report annually from each of the credit bureaus, and Katie Ross, Education Manager at American Consumer Credit Counseling, suggests pulling your credit at least biannually to avoid surprises. denigrate

“This way you can see who is reporting on you, learn what they’re reporting about, and take care of it,” says Ross. Use this link:

Do use credit cards.

Avoiding the use of credit cards altogether does nothing for your credit score. Retail credit cards—Sears, Lowes, JC Penny—do serve a purpose, but your history with major credit cards issued from credit card companies and banks are given more weight. Using them and paying them on time shows fiscal responsibility. However, try to avoid using over 30 percent of the credit at your disposal as this will give you a negative debt-to-income ratio. Using over 30 percent shows “that you are spending more than you have,” says Ross.

Having multiple credit cards with low balances demonstrates that there is a variety of credit available to you that you appear to not even need, and that improves your score. This is where retail cards can help. If you are a shopaholic that doesn’t trust yourself with such a card, get a gas card. Don’t apply for credit you don’t need. Every time you apply, an inquiry brings your score down temporarily. Having several cards with low credit limits does not improve your credit score.

Don’t skip a payment or be late.

If you are over 30 days late paying your bill, it goes on your credit report. If another 30 days go by without payment, your credit score is dinged again. These late notifications stay on your report for seven years. Late fees for a missed payment are usually over $30.00. When you’re ill or need professional medical care, you can rack up serious debt rather quickly—even if you do have insurance. This kind of debt is not necessarily reflected in your credit score unless you refuse to pay it.

“Doctors often do not take the time to report these debts because the process and the paperwork are time-consuming,” explains Ross.

Make arrangements with the doctor or hospital. Sometimes a payment as low as ten dollars a month is acceptable. If you avoid collections, your score will most likely remain unaffected.

Don’t close a credit card.

Closing a card brings down your credit score. The bureaus assess you by the length of time your credit line has been available to you.

Don’t file bankruptcy if you can avoid it.

If you are significantly overwhelmed with debt, it is only natural to consider the one move that would wipe much of that debt away. Avoid it if you can because not everything goes away, and your credit score will be shredded. A bankruptcy filing will haunt you for a decade, and it is truly a last-resort option. Even if you file for bankruptcy and then change your mind and rescind the filing, the initial filing will remain on your credit history. Student loans, taxes, and alimony are just some of the debts that bankruptcy does not discharge.

Do take out an installment loan.

Installment Loans are another avenue for demonstrating you have an array of credit options that you can adeptly manage. It is more than likely that you have at least one. You probably have a car loan, and you may very well have a mortgage. Both those payments should be on an automatic draft from your account. If you have only one installment loan, or if you don’t have one at all, here is an option: take out a personal loan for something you absolutely need, like car insurance. Most insurance companies give a discount to those who pay the entire year’s premium all at once. Then simply make the monthly payments on the loan. Ross further advises doing your own research in regard to interest rates before you actually have a bank look into your credit. Each formal inquiry about your score—or “hard pull”—is recorded and announces to the bureaus that you are looking to borrow money and thus increase your debt.

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