Your credit score is the most important factor in determining the interest rate you receive on a loan. Taking the time to make sure your score is as high as possible can help save you a lot of money. Even just one half of a percent difference in the interest rate could save you thousands over the term of the loan. So, how can you make sure your credit score is in good shape before you apply for a loan?
Sign Up for Free Credit Monitoring
You can't change what you don't know. The first step in earning a higher credit score is to know everything in your credit history. You can get a free credit report and scores online at Credit Karma.
They also offer free credit monitoring that alerts you each time there is a change in your credit score, a new credit inquiry, new accounts, or anything else that impacts your credit score. Here is a list of items that will hurt your score and how long they remain on your credit report:
- Late/Missed payments: 7 years
- Bankruptcies: 7 years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies
- Foreclosures: 7 years
- Collections: ~ 7 years, depending upon the age of the debt
- Public record: ~ 7 years, unpaid tax liens can remain indefinitely
Check Your Credit Report for Errors
Mistakes on consumers credit reports are shockingly common. The Federal Trade Commission conducted a study that showed one in five consumers had at least one error on one of their credit reports from the three major credit bureaus. And 33% of those consumers saw an increase in their FICO score when the error was corrected.
This means there is a decent chance you may have a mistake on your report that is hurting your score.
Go through your credit history closely and make sure there are no accounts that you're unfamiliar with. If you do find mistakes you can contact the credit bureau to dispute the information. Some common reasons to dispute a line on your credit score are:
- Someone opened an account in your name
- One of your existing accounts were stolen
- A bank, collection agency, or vendor made an error
They have 30 days to investigate the dispute. Here are the phone numbers for each of the three credit bureaus.
- Equifax: 1-888-548-7878
- Experian: 1-888-397-3742
- TransUnion: 1-800-916-8800
You can also file disputes online:
- Equifax: https://www.equifax.com/personal/disputes/
- Experian: https://www.experian.com/disputes/main.html
- TransUnion: https://dispute.transunion.com
Keep Your Credit Utilization Ratio Below 20%
Your credit utilization ratio is the amount of credit card debt you have divided by your credit limit. Basically, the higher your balances are the lower your score will be.
You should pay down your debt below 20% of your credit limit. This will maximize your credit rating when a lender pulls your credit so you'll get the best rate possible. If you want help keeping track of your credit utilization, try the Mint app. They have a new feature that tracks your utilization on each card you have synced with your account. It's a useful way to know when to stop using a specific credit card. One important thing to note is that Mint sets the target max at 30% and we are recommending 20%.
Have Someone Add You to Their Account
If you have a friend or family member with a credit card in good standing, ask if they will add you as an authorized user. An authorized user is someone who is authorized to use a credit account.
When the creditor does this, the entire account history will be added to your credit report. The helps by adding an additional trade line, but it also helps the average age of your open accounts, which makes up 15% of your FICO score.
The risk is minimal, in fact, you do not even need to possess a card, you're just using it to improve your score.
Contact Collection Companies
If you have any collection accounts on your report then you know they are significantly impacting your credit score. Fixing these is difficult and you might just have to wait the 7 years for the line to fall off of your credit report. What makes this issue more complicated is that there are two scoring models used; FICO 8 and FICO 9. With FICO 8, paying off the debt doesn't help your credit score, with FICO 9, it neutralizes it. One option you have is to write a "goodwill" letter. In it, you should take responsibility for the issue and offer to settle the debt. At the end of the letter ask if for a goodwill adjustment, effectively removing the negative line from your credit report. Keep in mind, they are under no obligation to do so, so be prepared for a "no."
Once you are actually in the process of shopping around for a loan, there are a couple tips that will help you minimize the impact of the credit inquiry.
- You should compare at least 3 different quotes to make sure you're getting a competitive rate.
- Make sure to have lenders pull your credit within the 30-day rate shopping window.
- All credit inquiries by the same type of lender within 30 days will count as one inquiry.
Post contributed by: Randall Yates is the founder and CEO of The Lenders Network, an online mortgage marketplace that helps homebuyers find reputable mortgage lenders. As a part of Randall's successful entrepreneurial career, he spends a chunk of time helping consumers understand their credit and lending his mortgage expertise to help them find the right type of loan.