Mind on My Money: Black Personal Finance 101
optimize your credit score
While it may seem that credit is a mysterious legendary beast from a foreign land, the fact is there are a few surefire ways to get the best benefits out of your credit. These tips are simple, easy to implement actions that can have you with a sterling credit score in a relatively short period of time.
Get To Know You
The simplest thing many people can do to start on their journey to improve their credit is to get to know what is contained in their credit file. It would be surprising how many people aren't aware of what their credit profile contains IF it weren't for the fact that until 7 short years ago, banks and other lenders were prohibited from disclosing this information to you. But today is a new day, and ignorance about your credit rating is no excuse. Take the steps to learn what is on your credit report. It is a living, breathing representation of your financial life. Verify what is accurate, fix any inaccuracies. As a consumer, you have a right to have a credit file that is 100% accurate.
The very first step in understanding your credit report is getting a copy of your credit report. Federal law provides each consumer with the opportunity to receive a copy of their credit report from each of the three major Credit Bureaus once every 12 months absolutely free. Your credit file can be requested several ways; by phone, by mail, or online here at www.AnnualCreditReport.com.
The next few steps require that you as a consumer verify the accuracy and validity of any and all information contained in your credit history file. It is not a pleasant task, but it is extremely necessary as it is estimated that as many as 70% of all credit reports contain inaccuracies. And even though the Credit Reporting Agencies are responsible to ensure that the information contained in your report is accurate, the real responsibility ultimately lies with you, the consumer.
It is important that a consumer checks his/her credit report from not just one, but all three bureaus. Because the companies do not share information, and some creditors don't report to all three, it is not uncommon to have different information reported on each profile. In order to ensure that your credit profile is accurate, it is necessary to review each report seperately.
Unfortunately, the Credit Reporting Bureaus are not perfect. In order to hold them accountable, you have to be aware of your rights and remedies, as well as their obligations.
Here is a dirty little secret about credit card banks; they make more money on fees than on the interest charged. So that payment that was one day late because you forgot to put it in the mail can result in you being charged not only a late fee, but over-the-limit fees if applicable, as well as a higher interest rate.
To better minimize the chances that you will miss a credit card payment, set up as many of your bills as possible for automated payments. Ensure that they will be paid up to a week before the due date.
Pay In Full
This is the tip that is the hardest for most people to implement. The fact is credit card companies absolutely love customers that carry balances from month to month and only pay the minimums on their cards. Why? Because the minimum is set up to apply the least possible amount of your payment to principle. As a result, you will prolong the period of time it takes to pay off your balance, and end up paying 2- sometimes 3- times the amount you originally borrowed.
To better maximize your credit score, and minimize the chances of your hard earned money going to some bank executive's trust fund, only charge what you can pay in full at the end of each month. Banks hate it. But it will be in your best interest...literally.
The Forgotten 30%
While most people think their credit score is simply paying bills on time, many don't realize that the amount of unsecured debt they are carrying in relation to their limits accounts for 30% of their credit score. What's more, many consumers don't realize that if you are deemed to be "overextended", it may actually lower your score. And almost no one is aware that banks consider overextension if a consumer is using more than 30% of their available revolving credit.
The tip here is simple: Keep your overall revolving credit balances under 30%. And for optimal scoring benefits, keeping your balances between 1%-9% yields the greatest effects on your score.
Mix it Up
If your credit history only contains three cell phone accounts, it will come across pretty skimpy to a potential lender. For the optimal benefits, your credit score takes into account the kind of accounts you have. A good mix of revolving credit such as credit cards, as well as installment accounts such as car loans or mortgage payments will give a lender a relatively accurate picture of how well you manage different types of credit. And while opening up new accounts of different types can pay off in the long run, it must be accomplished with the next principle in mind.
Whoa on the New Credit
Your pursuit of new credit accounts for 10% of your credit score, and influences the 15% of your credit score that is determined by the age of your credit history. One at a time.
Each inquiry that you allow a lender to make on your credit profile is logged on your report. While making one or two credit card applications over the course of several months may not severly hinder your score, an application spree in the mall may be interpreted by a potential lender as you experiencing cash flow issues. Before applying for any new credit, analyze the necessity of acquiring that new tradeline before you allow the application to go through.
Now once you get a new tradeline, you will have to be aware of the effect that it will have on the average age of your credit history. Each new tradeline on a relatively young profile will depress a person's score. It is imperative to ensure that your quest for new credit doesn't cause you to fall short of your ultimate goal.
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