24
Dec

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While you’re preparing your list of New Year’s resolutions for next year, you might want to consider what your current credit score is. If it’s low, then consider this: improving your credit score can save you hundreds, perhaps thousands, of dollars in interest charges and can open up a wide range of borrowing opportunities.

When 2016 rolls around, you may have a golden opportunity to improve your credit score once and for all with the forthcoming changes in how credit scores are calculated. Of course, there are some things that you can do right now that will begin to improve your credit score:

  • Stay on top of your outstanding bills. Try to pay off outstanding debt immediately, or as soon as you can.
  • Pay all new bills on time. Timely payments are key to establishing and maintaining a good credit score.

How Credit Scores Are Calculated

If you don’t already know how your credit scores are calculated, here’s how the credit reporting agencies determine your credit scores (which is how lenders assess your credit worthiness).

  • 35% = Your Payment History
  • 30% = The Amount of Debt You’re Carrying
  • 15% = The Length of Your Credit History
  • 10% = New Credit You’ve Established
  • 10% = Miscellaneous Factors Including Your Credit Mix

The Single Most Important Aspect Of Your Credit Score

It can’t be repeated too many times: the most important aspect of your credit score is paying all of your bills on time. Why is this so vitally important — because paying your bills in a timely manner demonstrates to lenders that you are a good credit risk. If you can’t (or won’t) pay your bills on time, you won’t be able to get credit at favorable rates, or you may not be able to get credit at all. If you’ve had a spotty payment history recently, any late pays will have the biggest effect for only about 2 years, then your most recent pay history will be the most important factor, so no time like the present to keep your credit squeaky clean from this time forward.

The Other Important Factor In Your Credit Score

After considering your payment history, you should next be looking at how much money you owe. That figure is used to determine the percentage of available credit that you’re currently using. The more credit you have available, the higher your percentage will be. But this number can be deceiving. If you have $3,000 worth of credit available, and you’ve got $1,500 in outstanding debt, then your percentage of credit usage will be 50%, which does not look good to potential lenders. On the other hand, someone with $30,000 in available credit has $6,000 in outstanding debt, their credit usage will only be 20%, even though the amount of outstanding debt is four times higher than in the previous example. Credit score calculations are most favorable when your credit usage is 30% or below.

The best way to improve this aspect of your credit score is to pay down as much of your outstanding debt as possible. If you can’t pay off very much, another way to improve your credit usage percentage is to obtain more credit. As long as you don’t abuse the new credit you make available, this will have the effect of improving your credit usage percentage, which, after all, constitutes 30% of your total credit score.

What Not To Do To Improve Your Credit Score

When you’re looking for ways to improve your credit score, there is one thing you should avoid at all costs: closing out your oldest credit cards or other credit accounts. This would have the effect of shortening your credit history, which will have a negative impact on your score in that category.

One More Credit-Improvement Strategy To Consider

If you have had some late payments in the past, or you anticipate being unable to pay any debt, then you should contact your lender and be honest with them. Chances are, you can negotiate some kind of payment plan that will forestall your account going into collections and being reported as a bad debtor to the credit bureaus. Honesty is always the best policy, and it’s absolutely essential to be proactive if you foresee being late or unable to pay a debt.

Upcoming Changes To Credit Scoring In 2016

In March of 2015, based on an agreement reached between several state attorneys general and the major credit bureaus, it was announced that big changes will be coming regarding the calculation of credit scores. The three major credit reporting bureaus, Experian, Equifax, and TransUnion all agreed to change the way they treat unpaid medical bills, which are a major cause of bankruptcy and damaged credit. Here is the substance of this major change in a nutshell: unpaid medical bills will not be disclosed to the credit bureaus for six months after they’re overdue. This will go into effect in September of 2016, and will have the effect of allowing consumers’ health insurance providers to pay claims, and will prevent medical bills from being reported as late payments because of delays in payment or disputed payments.

This change also includes having medical debts that are paid late, but eventually paid in full by insurance companies, removed from your credit report. Up to now, any unpaid debt, including medical bills, would stay on your credit report for seven years. This will become a thing of the past, which will be a vast relief to consumers, since, according to a recent report from the Consumer Financial Protection Bureau, 52% of unpaid debt stems from medical expenses.

More Good News For Consumers About Their Credit Scores

In addition to the good news about medical debts, the big credit bureaus will be required to perform much more thorough investigations of consumer disputes. TransUnion, et al. will be required to hire experts who are trained in handling disputes regarding identity theft, fraud, or errors resulting from filing errors. The three big credit-reporting agencies will also be compelled to do a better job of sharing information with each other when errors are discovered in a consumer’s credit report.

Another boon to consumers will be the widespread adoption of the FICO 9 scoring formulas, which has the effect of boosting consumers’ credit scores, without having to change their behavior. In addition, there’s steady pressure from consumer advocates to include “non-traditional” factors in credit reports. It seems that at least some of the big three credit-reporting bureaus are listening. Both TransUnion and Experian have put out reports in 2015 proposing that payment history information from sources like landlords or utilities could be used to boost most peoples’ credit scores.

All in all, it looks like 2016 will be a great year to get your credit score pumped up.


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