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Five highly effective ways to improve your credit before getting a loan

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

Your to-do list may read "improve credit score" but 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. (You may receive assorted credit card and personal loan offers as part of your enrollment, but resist the temptation to jump into a loan without doing a bit of Lending 101 homework.)

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 that appear as bad credit on a consumer's reports are shockingly common. The Federal Trade Commission conducted a study that showed one in five consumers had at least one error impacting their otherwise good credit reports from one credit reporting agency. 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. A little legwork can lift you to a good credit score, or eventually help you build up to excellent credit.

Go through your credit history closely and make sure there are no accounts you don't recognize. Also review your payment history. If you do find mistakes you can contact the below credit bureau where you find the error 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:

 

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. In short, your total available credit will compare to how much of the available credit you are usingYou 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. 

Credit Utilization Ratio Graphic

 

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 seven 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."

 

In conclusion...

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 three 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.

Tags: Debt Management