How may I improve my Credit Score?
Improving your Credit Score is not something that may be achieved quickly. It requires time, patience, and commitment. There are no miracle solutions or shortcuts, as some companies claim. The best way to improve your credit is to pay your debts on time, but we understand that there may be circumstances beyond your control that may prevent you from complying with all of your obligations.
The following are some suggestions to improve your Credit Score:
- Pay your debts on time.
- Late payments and/or in collections may have a significant adverse impact in your score.
- If you are behind in your payments, get current and stay current.
- If you always pay your debts on time, your score will improve.
- Bear in mind that paying off the balance owed on an account that has already been transferred to a collection agency does not imply that the adverse information will disappear from your Credit Report.
- Adverse information may remain on your Credit Report for seven years.
- If you experience difficulties paying your debts, contact your creditors or seek advice from a credit counselor.
- This will not immediately improve your score, but it may steer you in the right path toward the wise use of credit and timely payment of your debts, which will eventually improve your score.
- Keep your credit card balances low.
- If you have many outstanding debts, your score might experience a setback.
- Cancel your debts instead of transferring them from one account to another.
- The most effective way of improving your score is by systematically reducing the outstanding balances owed on your credit cards. In fact, if you still owe the same amount but have fewer open accounts your score might drop. Do not cancel credit cards as a short-term strategy to improve your score.
- Do not request credit cards that you do not need in order to obtain more credit. This could be counterproductive and could even lower your score.
- If you have not had credit for a long time, do not request credit excessively too quickly.
- New accounts will reduce the average age of all of you accounts, which will have a significant effect in your score if you do not have any other information in your credit report.
- When you are in the process of investigating and comparing the interest rate for a particular type of loan, be sure to do so within a short period of time.
- Credit Scores differentiate between applying for only one loan versus applying for several new lines of credit, in part due to the period during which the inquiries take place.
- Opening new accounts responsibly and paying them on time may improve your score in the long term.
- Requesting and reviewing your Credit Report does not harm you in any way. This will not affect your score as long as you request the report directly from the Credit Reporting Agency or via an agency that is duly authorized to provide credit reports to consumers.
- Only request and open new credit cards when necessary.
- Do not open new accounts to improve your score, since this will probably backfire.
- Have credit cards, but use them judiciously.
- In general, having credit cards and short term loans will improve your score. Persons who do not have credit cards, for example, are usually a higher risk than those who have proved that they have been prudent in handling credit.
- Keep in mind that closing an account does not imply that it will disappear from the report. A closed account will continue appearing in your credit report and may affect your credit score.
How can I deal with credit problems?
The credit report influences our purchasing power, the obtainment of an employment, the rental or financing of a home, and the acquisition of an insurance policy. A negative credit report can only change over time.
Creditors may reveal adverse information to the credit report for seven years (the corresponding term for bankruptcy filings is ten years). There is a standard method that is used to calculate the number of years that the adverse information may continue showing up in your report. Generally, the clock starts ticking at the date when the first late payment occurred.
When you are experiencing problems fulfilling your debt payments, it is crucial that you contact your creditors. Try to reach an agreement or repayment plan in which you send reduced payments so that you can honor your commitment. You should strive to make these payments on time and not wait that accounts are charged off or transferred to a collection agency.
The following are some suggestions to deal with credit problems:
- Contact the creditor or collection agency in charge of the debt in question and send them a certified letter, return receipt requested.
- Request proof of the validity of the debt in writing.
- Keep the original documents (receipts, sales invoices, invoice summaries). These papers may later be required to prove your claim. Only submit copies.
- Do not believe the companies that claim that they can provide you miracle solutions.
- Be adamant, for it will take time and effort to resolve credit-related problems.
- Credit repair companies will charge you for carrying out tasks that you could have done yourself free.
- Seek professional help if necessary. There are agencies that may help you prepare a budget and negotiate a repayment plan with your creditors.
When possible, look for an agency that provides counseling services in person. CONSUMER has seven branches that are located throughout the island. They have certified counselors who may advise you in the areas of budgeting, credit, as well as money and debt management. They will analyze your financial situation and will provide you a personalized action plan.
Advice in how to use your credit card
Credit cards can be very convenient, but they can become a headache if we do not use them properly. The following are some suggestions to the effect:
• Pay on time
Paying your credit card on time helps you prevent the imposition of penalties such as late payments and interest rate increases. If you pay on time, your credit history will be favorable and you could benefit from lower finance charges.
• Do not go over your line of credit
When you exceed your credit card's assigned line of credit, the creditor may charge you overlimit fees and increase your interest rate. Monitor the charges made on the credit card in order to avoid these penalties and to pay less each month.
• Avoid unnecessary costs
Creditors may charge fees when monthly payments are received late, cash advances are requested, or when you request a balance transfer. Verify the credit card contract to learn about the costs corresponding to these types of transactions.
• Pay more than the minimum
Try to send a payment that is higher than the amount shown in the monthly account statement. By doing this, you will lower the balance, you will pay off the debt in less time, and you will pay fewer interest charges.
• Be on the lookout to any changes in your credit card policy
The credit card issuers will notify and alert you about any changes in the fees, rates, or other aspects that are in the process of being implemented. After reading about these changes, you have the right to decide if you will continue using the card as usual and abide by the changes or if you will return the card because you reject the changes.
Credit is the term used to describe a transaction in which a person receives merchandise, money or servicers for little or no money, but promises to repay an amount of money within a specified time. The person or entity granting credit to another one charges a fee in return for the credit granted.
If credit did not exist, consumers would have to save the whole amount to make important purchases. Credit helps consumers improve their lives and allows them to reach a better financial well-being.
Types of Credit
• Traditional Credit – Loan in which payments are set for a specified period. These payments include insurance in case there is an involuntary situation.
• Consumer Credit – Short or mid-term loan (1 to 4 years) that allows you to acquire goods or receive services.
• Commercial Credit – Loan that is made to enterprises for the purchase of goods, payment of services or the refinancing of debts with other entities and short-term providers.
• Mortgage Credit – Money that is provided by a lender to acquire a property or a plot, as well as to finance the manufacturing of housing, office buildings, or other real estate, with a mortgage guarantee. The term on this loan may be medium or long term.
• Consolidated Credit – Loan that groups all of the loans that you have into a new and unique type of financing. Consolidating your loans allows you to lower your short-term interest rate as well as your payment
Credit Evaluation Factors
Creditors consider the following five factors during the process of reviewing a commercial credit application:
• Capacity – the ability of the firm to repay the loan.
• Collateral – forms of security you can provide to your bank or other lender.
• Capital – owner's investment in the business.
• Conditions – overall economic climate and external environment surrounding the bank and the business firm; intended purpose of the loan.
• Character – subjective judgment made by the banker about the prospective client. The lender decides if the client is trustworthy with regard to repaying the loan and generating a return on the investment.
Basic Information about Credit
As you probably know, a good credit history can be one of your most important assets.
The credit reporting system benefits individuals and society as a whole. Based on your payment history, current credit utilization and credit inquiries, loan grantors evaluate your credit risk prior to deciding if they will approve your loan application. The grantors review the details of your financial behavior through a credit report.
Credit reports allow creditors to make objective and accurate decisions in the process of approving loans. An individual with a good credit history and few debts will have an easier time obtaining new loans with favorable terms.
What is included in the credit report?
The credit report compiles data provided by your creditors, as well as information obtained from public sources. The credit reporting agencies continuously update this information in their database. Thanks to this information, consumers can prove that they are persons with a solid financial footing.
When making credit decisions, each credit grantor has its own policies and procedures to decide if they will approve a loan application and the loan amount to be awarded. Payment history is just one piece of information used by the grantors in their analysis process.
How does the credit information benefit all of us?
Sharing credit information contributes to the island's financial stability and the safety of our consumers and businesses. As a consumer, you benefit from objective and effective decisions taken by lenders, and you may also be eligible for more financing options. Businesses are in a better position to make wiser decisions, which diminishes risk and reduces the possibility of fraud. This may allow the granting of lower interest rates to consumers who are considered as having a lower risk; on the other hand, a secure and stable economy from a financial standpoint may promote more jobs, pave the way for easier access to loans, and may also help boost economic growth.
The credit score is a numerical snapshot of a consumer’s credit history at any given moment and is used by companies to better understand his/her financial wellness. The credit score is generated by a mathematical formula that uses the credit history data of an individual and represents the probability that a default might occur in the future.
The calculation of your credit score does not take into consideration your race, gender, age, income (or its sources), ethnic origin, creed, or marital status.
The following are the five factors that are used to assign the score:
- Payment History (35%) – A good record of on-time payments will help your credit.
- Outstanding Debt (30%) –High balances in relation to your credit limits can lower your credit score.
- Credit Account History (15%) – An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries (10%) – When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation.
- Types of Credit (10%) – A healthy credit profile has a balanced mix of credit accounts and loans.
Credit Score Myths
There are some myths about credit scores. If you are in the process of applying for new credit, pay special attention to the following myths so that you are not deceived:
• Myth 1: Applying for new loans affects your credit score, but requesting a copy of your credit report does not.
Applying for a new loan is not what affects your credit score. What really impacts it is the number of inquiries made on your credit report. It is suggested that no more than three credit requests be carried out within a 90-day period. Otherwise, your credit score could drop.
If you wish to lessen the impact of the drop in your credit score, we suggest that you investigate beforehand the creditors’ acceptance policies and conditions so that you can know whether you will meet their requirements.
The FICO credit score treats multiple inquiries made within a 14-day window as if they were one. For each loan application, the FICO scoring model deducts five points in the individual’s credit score.
You may request a free copy of your credit report once a year from each of the three national credit bureaus: TransUnion, Equifax, and Experian. For more information, you may visit the additional website: www.annualcreditreport.com.
• Myth 2: Closing lines of credit will never help improve your credit score. While it is true that opening many accounts hurts your score, once they are opened it is impossible to offset the damage.
When calculating credit scores, they consider the difference between the available credit and the balance owed.
If you close the lines of credit this will alter your debt utilization ratio and could harm your credit score.
On the other hand, it is not recommended that you close old accounts. This is counterproductive and will hurt your credit score.
It is recommended that instead of canceling and closing accounts, you should begin reducing the balances owed on your credit cards. This will help improve your credit score.
• Myth 3: All credit scores are the same.
Credit scores are often called “FICO Scores” because most credit bureau scores used in the U.S. are produced from software developed by Fair Isaac and Company (FICO). But it’s important to understand that not every credit score you can buy online is a true FICO Score. The FICO Score has a different name at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data.
• Myth 4: For the past three years, the formula that calculates the FICO score ignores any reference to a debt consolidation or repayment plan that may exist in the financial past of the person.
Creditors continue to report any arrears in their clients’ debt consolidation or payment plans. If your payments are not received as agreed, this will be reflected in your credit report and will affect your credit score.
What is more convenient?
The use of debit cards has been increasing in recent years. Most banks offer debit cards as a means of access that clients have to the available funds in their accounts.
Credit cards allow us to pay later for goods and services we purchase and enjoy today, which is suitable for many people who are facing a current cash crunch which would have prevented them from paying for the purchase.
So the question is, why does an ever increasing number of people nowadays prefer to use debit cards instead of credit cards?
Many people prefer debit cards because they do not incur new debts and are forced to only use the financial resources currently available. Those who follow a budget and are in control of their personal finances, consider that a debit card is more convenient because it allows them to keep in check their spending.
One of the disadvantages of debit cards is that if fraudulent transactions occur in the account, your bank account balance will immediately drop and you will have to await the processing of your claim to recover those funds. This could negatively affect your budget.
If the fraudulent transactions had occurred with a credit card, you would not be liable for this amount during the investigation of the claim; thus, it would not represent an impact to your budget.
Therefore, a problem with our debit card can wreck our personal finances. Should we then stop using debit cards? No, because aside from the psychological boost of having no debt, debit cards may have the following advantages:
• Debit cards do not entail an annual fee, as they are tied to a bank account. Many credit cards charge an annual fee, especially if they provide points or airline miles.
• If you do not have any credit history or if it is not favorable, your credit card application may be denied. However, as soon as you open a bank account, you are provided a debit card.
• Nowadays you can obtain debit cards with the Visa or MasterCard logos, which grant you dual use for your card. They are very convenient for people who do not have any credit cards and need to make purchases or reservations.
What does the credit report include?
The credit report compiles information from your creditors and from public sources. This information is regularly updated in the credit bureaus’ databases. The credit report shows the performance of a person following their credit application. It is a record of the credit cards and loans activity, as well as other credit transactions processed during a period on behalf of an individual. It also contains their personal information.
The credit report provides data relating to an applicant’s paid accounts, outstanding balances, and available credit. In turn, the credit report indicates whether the applicant has any pending lawsuits, if they have ever been arrested, or if they have filed for bankruptcy. It also provides work-related information, as well as the applicant’s current or previous places of residence. This information is continuously gathered from various credit providers.
There are three national credit bureaus: Equifax, Experian and TransUnion. They compile information and then sell the data to banks, mortgage lenders, credit unions, credit card companies, department stores, insurance companies, landlords and employers. Lenders use this information to decide whether or not to approve applications for personal loans, credit cards or mortgages.
Each credit grantor has its own credit-application acceptance policies. Credit history is just one piece of information used by credit grantors in the analysis process.
Credit bureaus do not intend to alter creditors’ decision process. Their role is solely to provide clients’ data.