19 Oct Tools of the Trade
Your credit report is more than simply a tool for potential creditors and lenders to determine your credit worthiness. It contains a plethora of personal data you can leverage to improve your financial life. Here are four ways you can use your credit report to set attainable financial goals:
1) Stop Living Beyond Your Means
Credit scores help lenders, landlords, and in some cases utility companies to determine the statistical probability that a borrower will default on a loan. Creditors will often view the available credit you use, also known as debt utilization, as an indicator of your financial stability.
To maintain credit worthiness, the general rule of thumb is that one should keep all total credit balances on revolving accounts at 30 percent or less of your total available credit. In order to determine of you are using too much credit relative to your income, the same standard can be applied to your budget. Divide the reported balance by the credit limit for the revolving accounts listed on your credit report. If any accounts exceed the 30 percent threshold, devise a budget plan to aggressively reduce your credit balances. Also, consider potentially adjusting your monthly expenses appropriate to your income to ensure your lifestyle is not making you overly reliant on credit.
2) Move Beyond The Mistake
Negative or adverse credit activity on your credit report includes delinquent accounts that went to collections, as well as active loans and credit card accounts that were paid after the payment due date. First, verify that the details surrounding negative information in your report are accurate. If they are not, you have the legal right to submit a dispute to the reporting credit bureau by mail, phone, or online, along with supporting documentation of why the information is invalid. If the credit bureau’s investigation determines that your dispute is justified, the event will be removed from your report.
If the events are accurate, note two important dates on your credit report: the date the account became delinquent based on the bureau’s records, and the month and year the event will no longer be included in your credit report. Both are meaningful to your financial goals, for a few reasons.
Delinquencies, charge-offs, bankruptcies or late payments may stay on your credit report for as long as seven years. However, their potential impact to your credit score may be most significant in the month following their report to the bureau. As time passes since the event was initially reported, it have less and less of a negative impact on your score, although it will still appear on your report. If your future financial goals include buying a new home or car, for example, waiting at least two years from the date a negative credit was reported could lessen the event’s impact on your ability to find competitive loan terms, particularly if the rest of the information in your credit history is positive.
3) Credit Card Favoritism
Over the course of your “credit life” you may favor some credit cards over others, based on interest rates, rewards earning potential, credit limits, fees, and other product features and benefits. Though you do not have to use a credit card for the account to be included in your credit report, account “age” is a factor in how your credit score is calculated. Essentially, the cards you have owned the longest contribute most positively to your credit history because they demonstrate your ability to manage credit responsibly, over the long term. Take note of which of your credit card accounts you’ve had the longest, and strive to keep them active, and in good standing
4) Optimal Timing
If your future financial goals include improving your credit score, as well as applying for new loans or lines of credit, your credit report can help you determine whether your current credit card payment strategy is as advantageous to your credit score as it could be. Under the revolving accounts section of your credit report, you’ll notice that credit balances are reported monthly. To reap the benefits of paying your credit card balances aggressively or in full each month, adjust the timing of your payments to reach your credit card issuer before the statement closing date. Assuming the payment is applied before that date, the balance reflected on your report will reflect your most recent payment or a $0 balance if you pay in full. As your utilization rates improve, your credit score will benefit!