Maintain a Healthy Credit Report

April 04, 2016
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Your credit report is an accumulation of information about your bills and loans, your repayment history, your available credit, and your outstanding debts. These reports are typically used by lenders when deciding whether or not to accept a loan or credit application. A healthy credit report can help you secure the funding you need to purchase a new home or car, fund a child’s education, or start your own business. The following actions can help you maintain a healthy credit report.

Establish and Maintain History: A rich history about your ability to pay off debt over time will paint a more complete picture for a lender inquiring about your financial habits. Therefore, consider maintaining your oldest credit card. Credit companies often suggest that you also maintain four to six accounts to showcase your commitment to managing multiple debt sources.

Close Extra Accounts: We’ve all be tempted by the free t-shirts, duffle bags, and contest giveaways offered by credit card companies in order to attract new customers. However, after we’ve received the gifts, we often forget about the accounts we’ve just opened. Many open accounts on a credit report may be a red flag to a lender, indicating that you could easily get into financial danger with the large amount of readily available credit. Consider closing any accounts that you do not use. This strategy may also minimize your exposure to identity theft.

Note: Cutting up the card itself or just not using it does not mean the account is closed. To properly close an account, you must call or write to the company with your request.

Make the Minimum Payments: Delinquencies on payments remain on your credit report for seven years, even if you’ve since settled the account balance and paid the debt. Therefore, you should always try to make at least the minimum payments by the due date requested by the creditor or lender. 

If you are in a financial bind and decide to ignore an account for a period of time, be aware that accounts sent to collection agencies or charged off by creditors, meaning they have written the debt off as a loss, will also remain on your credit report for seven years. Consider contacting your creditor if you find yourself in this situation, rather than just ignoring this serious problem.

Pay Down Your Debt and Keep Debt in Line with Income: Determine your debt-to-income ratio by adding the balances of all your loans and credit cards, and comparing that with the amount of income you receive annually. If your total debt exceeds more than 20% of your annual income, lenders may be hesitant to consider allowing you more credit. If you have a large amount of debt, develop a strategy to pay it off gradually and within your budget considering your other expenses. One strategy may be to consolidate your payments under a home equity loan, which offers tax-deductible interest payments. In the meantime, consider curbing excess spending and avoid further debt.

Control the Number of Inquiries about Your Credit: A large number of inquiries on your report may signal to a lender that you are in need of a lot of credit or preparing to take on a large debt. Neither situation bodes well for your ability to take on additional debt. Be aware that each time you apply for a new credit card, even if it is only to receive a free gift, an inquiry will appear on your report. Also, avoid multiple inquiries by car dealers and mortgage lenders by not authorizing a credit check until you have made the decision to purchase from that particular lender. Inquiries remain on your report for two years.

OPT-OUT of Inclusion on Marketing Lists: While soft inquiries, those made by marketers and others wishing to sell you something, do not usually appear on the version of your credit report shown to lenders, these inquiries indicate that your personal information may be available and used by the companies listed, increasing your exposure to identity theft. Many marketers receive lists of potential customers directly from credit bureaus. You can “opt out” of being included on lists sold to these companies by either writing to each of the three credit bureaus or calling (888) 5OPTOUT. This action will remove your name from marketing lists for two years.

According to the Fair Credit Reporting Act (FCRA), you can request a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year. For your convenience, you can access all three agencies through a single website, Monitor your credit report frequently and take actions that build and maintain good credit.

This material was prepared for Wealth Advisors of Tampa Bay use.