Strengthening Your Credit

While gaining credit is largely a numbers game, local experts say there are several common sense guidelines consumers can use to add muscle to their creditworthiness.

Beefing up

One of the most important factors in a lender’s decision to give credit is the credit score – that seemingly magical number between 300 and 850.

Poor payment history will weaken a credit score faster than anything else, since, according to Fair Isaac Corp., about 35 percent of a credit score is based on payment history. FICO introduced the credit score in the 1960s.

“Your credit report carries your last two years of credit history,” said Mike Cherry, president of Consumer Credit Counseling Services in Springfield. “If you start paying your bills on time today, and you haven’t been for a year, in 24 months, that bad payment history will fall away.”

CCCS is a not-for-profit organization that provides budget counseling and financial education services, as well as debt management for people without sufficient income to make full monthly payments to unsecured creditors.

Another key aspect is debt-to-credit ratio – the amount of debt a person has compared to their total credit limit on all revolving credit, such as credit cards and home equity lines of credit. About 30 percent of a credit score is based on debt-to-credit ratio.

“The most important thing would be to make payments on time, but the second is to make sure that your outstanding debt on your revolving lines of credit is 50 percent or less,” said Marita Thomas, vice president of commercial lending for Empire Bank. “If you’re maxed out on a (credit) card, you’ll probably be over when the interest is added at the end of the month – and that carries a lot of weight.”

Other factors in a credit score include the number of active accounts – too many accounts can be detrimental – and the length of credit history. In general, a longer credit history is better. The number of active accounts weighs in for about 10 percent of the credit score, and the length of credit history accounts for 15 percent of the credit score. The remaining 10 percent is based on the mix of credit types.

Changing the score

There are ways to improve an individual credit score, no matter how bad it is, credit experts say.

Aside from making payments on time every month and reducing the amount of debt in relation to total available credit, consumers also should avoid opening multiple new credit accounts or increasing credit limits.

“The more accounts you open in a short period of time, the more negative impact it has on your credit report,” Cherry said.

And, of course, public records – bankruptcies, court judgments and liens – stay on the record for 10 years, though Cherry said their impact diminishes with time.

Fair Isaac Corp., in a pamphlet called Understanding Your FICO Score, offers other tips for improving scores. The company encourages rate shopping for a large loan, such as a mortgage, over a short period of time. The score distinguishes between a search for a single loan and a search for many new credit lines, in part, based on the length of time in which the inquiries occur.

The company also says not to close old accounts to raise your score – late payments won’t disappear, and long-established accounts indicate a history of managing credit.

James Philpot, professor of finance at Missouri State University, said unexpected factors also can affect creditworthiness, such as driving records.

“Your credit score plays into your auto insurance premiums, and your driving can play into your credit report,” he said.

He also said that major purchases should be spread out – buying a car while trying to get a home loan can create the appearance of increased credit risk.

No matter how much work is involved, fixing bad credit won’t be a quick process, Cherry said, adding that people should beware of companies offering instant credit gratification.

“There is no quick fix – there is nothing you pay someone to do that you can’t do yourself, so it’s ludicrous to pay someone to fix your credit report,” he said.

Keeping tabs

Cherry recommends checking their credit reports annually – a task that is now free through www.annualcreditreport.com, which was created by a 2005 federal law allowing everyone to check their credit report once a year for free.

Individuals can now get their report each year from credit bureaus Experian, Equifax and TransUnion.

While the three reports are not identical, Cherry said consumers should start by retrieving one report – if everything seems correct, you can space out the others over the year, allowing three different reports a year.

“If you pull the first one, and there are problems on it, I’d recommend pulling the others and looking at them all,” Cherry said.

If there are discrepancies or errors in a credit report, consumers can contact the bureaus to remedy them.

The free reports, however, won’t provide the credit score – those are available for a fee.

MSU’s Philpot understands the necessity of monitoring credit.

“When I bought a house, I got a call from my banker as we were waiting for approval, and he was asking about a several-thousand-dollar lien to the (Internal Revenue Service),” Philpot said, noting that the creditor had typed in an incorrect Social Security number. “That’s why we have the law in place allowing us to double-check.”

Self-initiated credit inquiries, along with those by employers or without the consumer’s knowledge, won’t have a negative impact.

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