Let me start by saying I am not a financial guru of any sort and the information in this post simply reflects the experiences that we have had dealing with a financial professional speaking directly about our circumstances.
Our current society is built around credit! Go to buy a cell phone, let me check your credit! Go to buy a car, let me check your credit! Go to buy a house, let me check your credit! This is a common phrase we hear whenever we want to make a “large” purchase, but has anyone ever actually told you how to help your credit?
Most times we hear the simplest explanation on how to manage your credit and it seems so easy… Pay your bills on time, make your car payment, pay off your credit cards and never let your balance get too high. Easy enough, right?
My wife and I recently began meeting with a credit counselor in an attempt to correct some bad/necessary decisions we have made when life didn’t go as planned. While meeting with this counselor part of the process is credit education, and boy did we get a few great nuggets. We consider ourselves pretty intelligent people but what we found out in these sessions, although not ground breaking, made me think about what I really know about credit.
Here are 3 quick tips that I found useful to help you control your own destiny when it comes to your credit.
Never pay your credit cards down to zero!
This little piece of advice was mind blowing for me. Did you know that paying your credit cards down to zero every month negatively affects your credit score? For years, my wife and I thought we were being great stewards of our money when we were able to pay those credit card bills in total. Contrary to popular believe this is due mostly to the fact that credit companies report your balance at the end of a billing cycle, so when you pay that bill down to zero and don’t make any additional purchases prior to it being reported it seems as though your credit card utilization is 0, which negatively affects your credit. The key takeaway for my wife and I was to leave a very small balance on our card so that when it is reported it shows the utilization and a low debt utilization ratio. You always want to show that you have more credit available then credit you use. Based on the research I have done, a credit utilization of 10% is a great goal to reach for. So if you have a $1000 credit limit, try to only utilize $100 of the credit at any given time.
Only pull 2 of the 3 credit reports!
Once again… MIND BLOWN! So, how many times have you been told that you should only pull your credit score once a year because the more you pull it, the more it will negatively affect your score. Well that little fact is true but they were withholding information. Your credit score will be negatively affected if you pull your credit report from all three reporting agencies. The difference is explained as a hard vs soft inquiry. If you pull only 2 out of the three it is more of a soft inquiry and does not appear on your credit report. So you have the opportunity to see what is on your credit report and correct a few items without it hurting your score, and you can pull it as many times as you’d like.
Items that hit collections hurt your credit when you make monthly payments!
Ok so this one was hard for me to swallow. We had a few situations where debts that we held were sent to collections. This is not uncommon but no one takes the time to explain all of the options that you have with regards to this process. So I learned a lot during this discussion. One of the biggest takeaways for me had to be that it is best to let a debt sit until you can make a lump sum negotiated buyout as compared to a monthly payment.
When Lydia and had a few items go to collections we thought the best course of action was to call the debtors and workout some type of payment plan. We assumed they would be happy to get a payment plan in place and we would be better off because we could pay an amount that fit within our monthly budget. This all sounds like a novel idea but what we were unaware that the monthly settlement payments were affecting our credit negatively. We thought we were paying down this debt and building our credit, but that was not the case.
Each payment you make on a debt that has reached collections affectively reopens that debt to be reprocessed and count against your credit score each month. It is almost like opening a scab over and over again right as it starts to heal, you open it back up to just start the process all over again.
We found that it is best for you, maybe not the creditor, to not make any payments and simply save all the money you would have paid until you have a lump sum that you can use to negotiate a complete settlement. The hardest part for responsible people is to not pay the bill. You will get a lot of nasty calls and letters but you have to remain steadfast. After you have saved up enough that you believe to be a fair buyout amount, we thought roughly 30%-50% of what was owed was fair, you call the creditor and talk to them about a lump sum payment settlement. If you are willing to take this step you can both save yourself a lot of money in the long run and help bump up that credit score.
Once again, we are not financial professionals, so do not assume our advice is best for every situation. These tips have helped us greatly improve our credit score and position ourselves for home ownership again, and we simply wanted to share the knowledge. Make sure you contact a professional if you want to find additional ways to improve your credit score.