We all know the value of a good credit score. We all try to maintain one. Sometimes, though, life throws us a financial curve and that score declines. What steps can we take to repair it?
Reduce your credit utilization ratio (CUR). CUR is credit industry jargon, an arcane way of referring to how much of a credit card’s debt limit a borrower has used up. Simply stated, if you have a credit card with a limit of $1,500 and you have $1,300 borrowed on it right now, the CUR for that card is 13:2, you have used up 87% of the available credit.
Carrying lower balances on your credit cards tilts the CUR in your favor and promotes a better credit score. If you borrow less than 30% of a card’s debt limit per month, it will help you. If you borrow less than 10% of the debt limit on a card per month, it will help you even more.
Review your credit reports for errors. You probably know that you are entitled to receive one free credit report per year from each of the three major U.S. credit reporting agencies – Equifax, Experian, and TransUnion. You might as well request a report from all three at once. About 20% of credit reports contain mistakes. Upon review, some borrowers spot credit card fraud committed against them; some notice botched account details or identity errors. Mistakes are best noted via postal mail with a request for a return receipt (send the agency the report, the evidence and a letter explaining the error).
If you have been doing the right things, tell your creditors to report them. If you fail to pay your bills, your creditors will let the major reporting firms know. What if you unfailingly pay the bills on time for a year – will they tell the major reporting firms about that?
Quite often, “good behavior” goes unrecognized by certain creditors while “bad behavior” gets a quick red flag. Urging a creditor to report the things you are doing right to the credit reporting firms can aid the comeback of your credit score.
Think about getting another credit card or two (but not too many). Your CUR is calculated across all your credit card accounts, in respect to your total monthly borrowing limit. So if you have a $1,200 balance on a card with a $1,500 monthly limit and you open two more credit card accounts with $1,500 monthly limits, you will markedly lower your CUR in the process. Alternately, you could lower your CUR a bit by keeping just one credit card, but asking that card issuer to raise your debt limit. Refrain from trying to open several new lines of credit at once – that could actually harm your score more than help it.
Think twice about closing out credit cards you rarely use. When you realize that your CUR takes all the credit cards you have into account, you see why this may end up being a bad move. If you have $5,500 in consumer debt among five credit cards and you close out three of them accounting for $1,300 of that revolving debt, you now have $4,200 among three credit cards. In terms of CUR, you are now using a third of your available credit card balance whereas you once used a fifth.
Beyond that, a portion of your credit score is based on account longevity. This represents another downside to closing out older, little used credit cards.
New FICO scoring may also help you out if you have problem credit. The FICO XD score – a rating recently launched in a Fair Isaac Co. pilot program with a dozen credit card companies – could open doors for you if you have been rejected by certain credit card issuers. On-time bill paying is a big component in the FICO XD score calculation.
Roughly 15 million consumers now have XD scores, including 55% to 60% of recent credit card applicants. Between 35-50% of those applicants are estimated to have XD scores above 620, which can be the make-or-break point for getting a credit card.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.