On a numeric grading system, it helps to have a credit score of 740 or better. And while the medium credit score in America today is still around 720, many lenders have now raised the bar 20 points higher to 740. Fannie Mae has also raised its credit score requirement; from 580 to now 620 or higher. According to FICO, the credit rating agency behind the ratings system, only 13 percent of Americans have the highest credit score which is usually around 800 percent or better. For the rest of us, it’s always good to take the necessary steps towards improving one’s credit score. Here are a couple of suggestions in that regard:
First, look at your credit reports. To start with, go to: www.annualcreditreport.com which provides a free, online credit report from each of the big three consumer credit reporting firms.
Look for any errors. Errors on credit reports are more prevalent than you may think. Sometimes information can be years out of date, improperly posted or just plain wrong. You can use a dispute form to report mistakes or write a letter detailing them. Who knows, you may even find something within the report that can help boost your score.
Try and stabilize your credit profile. It is true that a personal bankruptcy will stay on your credit report for 10 years as well as late payments on credit cards being for as long as 7 years. Yet over time, credit bureau’s generally give more weight to the consistency of credit payments than to disruptive events. Remember, the key to the rehabilitation process is with consistency. In addition, here are some other key instructions that can improve your credit profile:
>> Plan to solve any immediate crisis in your financial life. If you can’t pay your bills, for example, you won’t be improving your credit score anytime soon. As for debts; try paying off the smallest amount first, then the next smallest and so forth as your finances allow in the coming months and years.
>> Cutting up a credit card won’t help. While it may feel like a clean break, this does not close your account with that credit card issuer. If you want to close an account, the best way to do this is by paying down your balance, calling the issuer, confirming that zero balance and verbally canceling the card. Then check your credit report later to see that the account has been closed “at the customer’s request”.
>> Stay on the radar of credit card companies. Stopping card use may actually do you more harm than good since the FICO scoring formula favors at least occasional activity with one’s credit card.
>> Keep balances low or paid in full. The key here is to make every effort to pay off 100 percent of the balance each month.
>> Set moderate credit limits. If a credit card company offers you a card with a really generous limit, or offers to raise your limit, refrain from accepting the offer.
>> Start a new savings account or build up the one you have. Creditors look for signs that you have cash reserves as well as seeing those reserves are being increased or replenished.
In the final analysis, if your score is too low, it may seem as though you are facing a mountain that will take years to climb. However, remember this; credit scores improve gradually and the biggest, positive sign to an improving credit history is a pattern of consistently paying off debts and bills. And while there is no magic wand that will instantly and dramatically improve your score, it is a step in the right direction to start the process of rebuilding your credit history today rather than tomorrow.
This Month’s Parting Shot: There was an interesting article back in the January 2012 issue of Bloomberg Magazine that shed some light into the most recent big bank bailout. According to the article, from 2007 to March of 2009, the Federal Reserve either loaned or guaranteed some $7.7 trillion dollars to Citibank, Bank of America, Goldman Sachs, Citigroup and Wells Fargo. As it turned out, the amount of these advances were considerably larger than the American public was led to believe. The article, in fact, went on to describe this amount as being some 11x times more than the Treasury actually promised through TARP (the Troubled Asset Recovery Plan). For example, on one day alone; Dec. 5, 2008, some $1.2 trillion dollars was borrowed from the Federal Reserve.
Furthermore, these banks were able to borrow this money at 0.01 percent (that being; one one-hundredth of a percent). This resulted in a $13 billion dollar profit being made from borrowing through the Fed. Because of this; from September 2006 to September 2011, the assets of these big banks grew some 39% from $6.8 trillion to $9.5 trillion. To their credit, almost all of these loans have been paid back. But talk about a ton of money being made by the big boys on the spread . . . .
Ike S. Trotter, CLU, ChFC, is a financial advisor in Greenville. Securities and investment advisory services provided through Woodbury Financial Services Inc., Member: FINRA, SIPC and Registered Investment Advisor, P.O. Box 64284, St. Paul, MN 55164. Tel: 800.800-2638. IKE TROTTER AGENCY, LLC, and Woodbury Financial Services are not affiliated entities. Information and opinions expressed are those of the author and not necessarily those of Woodbury Financial Services Inc.