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The Freedom 30 Program: Managing Your Credit Rating


When it comes to credit reports and scores, do you ever feel like you were signed up by someone else to participate in a game you weren’t given the rules to? If so, know that it doesn’t have to be that way. While the methods for compiling information and algorithms for calculating scores can get complicated, the steps you can take to create superior credit are relatively straightforward.

It’s important to remember that credit standing is arguably the area of personal finance with the most misinformation. That’s why getting your guidance on credit reports and scores from trusted, informed sources is so important. While your cousin may consider themselves an expert, basing major financial decisions on what they think they know is highly risky.

As a reminder: The Freedom 30 is a year-long program to help put some structure to the process of putting your money to work for you. The idea is that you dedicate a 30-minute time slot each week to achieving financial freedom – whatever that looks like for you. Each month, you’ll receive a list of four mini-projects to complete within a particular financial wellness theme. If you didn’t have the chance to start the program in January, don’t fret. You can always add catch-up sessions to your schedule.

Week 1 Project: Get your reports and scores

You’re in luck! You’re entitled by federal law to your credit reports from the three nationwide credit reporting bureaus – Equifax, Experian, and TransUnion – for free once every 12 months. There’s even a centralized system for accessing your reports featuring a website, telephone number, and mailing address for acquiring your reports. Here’s that info:

Web: annualcreditreport.com
Telephone: 1-877-322-8228
Mail: Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

The website is typically recommended as the best method for getting your reports since you can access them in just a few minutes and print them out or save digital copies.

While other questionable companies may try to lure you into purchasing their reports with special offers or add-ons, you have all the information you need about the contents of your credit reports with the documents you’ll receive via the Annual Credit Report Request Service.

Remember that your reports from each bureau can and usually do contain different information, so it’s a good idea to get separate reports from Equifax, Experian, and TransUnion through the service.

Unfortunately, there isn’t a federal law mandating free credit scores for people in the U.S. However, it’s becoming more common for companies to offer scores at no cost. Common sources of free scores include:

  • Financial institutions
  • Credit card companies
  • Financial services apps

It’s important to remember that the most crucial score to track is the one your lender will be using. Most commonly, that will be a FICO credit score. If you’re not able to find a way to get your FICO score for free, you can buy it for a small fee at myfico.com. You’ll have a FICO score from each credit bureau: Experian, Equifax, and TransUnion. If you’re planning a big financial next step, like buying a house, you’ll want to see all three of your scores. If you’re in a learning phase right now, seeing just one of your scores is likely okay.

Takeaway: As this exercise concludes, you should have all three of your major credit reports, at least one credit score, and familiarity with both.
For next week: Start preparing a list of any questions you have about your reports and scores.

Week 2 Project: Learn the ropes

Now that you’ve got your reports and at least one of your scores, it’s time to start learning how all those numbers, words, and symbols apply to your credit standing. While there are a whole lot of rabbit holes you can go down when it comes to credit reports and scores, it’s important to remember that the factors that go into your FICO credit score are these:

Payment history (35%)
With this being the biggest factor in your score, it’s imperative not to miss any payments in the future. If you have past late payments, remember that the FICO score heavily emphasizes the past two years of history. Because of this, you can typically offset the impact of past delinquencies if you’re able to make a lot of prompt payments.

Amounts owed (30%)
This one trips up many people. They always make timely payments, so they don’t understand why their score is so low. Simply put, maxing out on your credit cards or other revolving lines of credit will bring down your score. Your best strategy is to only put amounts on your credit card which you can pay off in full each month.

Length of credit history (15%)
In terms of your FICO score, older credit is better. If you’ve had a credit card open for many years, you’re typically better off leaving it open.

Pursuit of new credit (10%)
This area typically isn’t too much of a problem for most people. If you apply for credit only when you need it, you shouldn’t have too many issues with this part of the FICO score.

Types of credit in use (10%)
Diversity of credit is looked upon favorably by FICO’s scoring model. If Person A has a long history of on-time payments on a credit card and keeps their balance low, they should have a good credit score as long as there are no negatives on their reports. If Person B has the same credit card history as Person A but also has a history of on-time payments on an auto loan, Person B will have a better FICO score.

The full range of the FICO score is 300-850. Some lenders will want to see that you score at least 620 before they are open to lending to you. The average score in the U.S. hovers around 715. If you’re at 780 or above, typically, you’ll be in the highest score bracket when qualifying for lower interest rates on loans or other types of credit. As always, talking to your financial institution about their lending criteria can be invaluable when it comes to borrowing money.

Takeaway: You now know what goes into your FICO score calculation.
For next week: Now that you know the recipe for your score, begin thinking about how the information you saw on your reports pertains to your current score.

Week 3 Project: Assemble your action plan

If you’ve been using credit for a while, your reports will contain a hefty amount of information. Now’s the time to break that data into actionable items you can put into an overall strategy for addressing your credit standing.

Using the score factors discussed last week, review your credit reports and take notes on the accounts you believe currently have the most significant negative impact on your credit. Remember, too, that having strong credit isn’t just about diminishing the impact of negative items. It’s also necessary to add positive information. If you have yet to open accounts, it will be challenging to progress on your credit.

Working on your credit often involves removing incorrect items from your reports. Research has shown that 79% of reports contain errors of one kind or another, whether harmless, like a wrong address, or potentially more damaging, like a mistakenly listed collection account. It’s wise to correct the false data using the dispute process for both types of errors.

Takeaway: At the end of this mini-project, you should have an action plan with at least three tasks to complete to improve your credit standing.
For next week: Make a list of any accounts causing confusion and any next steps that seem unclear.

5/23/24

 

 

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