Part 1 – Check Your Credit
It’s time for some good news, isn’t it?
Don’t look now, but interest rates are at record lows. Whether you own a home, car, or have a credit card, it’s a wonderful time to begin exploring ways to lower your interest rate. Here’s the really, really good news: a lower interest rate will probably mean lower payments. This can give you financial breathing room to focus on your craft or pay down debt more quickly.
Today, I’d like to make sure you can participate in the interest rate game. Once we’ve solved that problem, we’ll talk later about how to refinance your debt. Sound good? Great!
Let’s move on these steps to check your credit report:
Gather Your Credit Report
You’ll need this document for two reasons:
- ABC News reported recently that over 90 percent of credit reports are wrong. You’ll want to scan your report for mistakes and areas that may quickly be improved.
- The most important part of the refinance process involves your FICO score. This is the score many credit companies use to determine your credit worthiness. Even if this score won’t be the one used to determine whether you qualify, other processes are similar.
You could snag a free credit report from this Federal Trade Commission website. This will let you check your credit for any late payments and credit reporting problems.
Unfortunately, the free credit report doesn’t include your actual FICO score. This number, between 300 and 850, is important to know if you’re going to gauge how companies regard you as a credit risk.
You have two choices:
- Use the free report if you can’t afford to buy the actual score. You can still correct any fallacies and clean up old debt.
- Head to one of the three major credit reporting websites OR myfico.com (the official FICO website) and pay a nominal fee for the number (you’ll receive the same data at all three sites, so you’re just looking for ease of use and price).
Review The Report
A client once told me that reading a credit report is like a trip to the dentist: you’re glad you went through the procedure, but it isn’t fun. I would say that’s true.
The report lists all debt. You may say, “Wow! I don’t remember ever opening that credit line.” I hear that reaction often, and had it myself when I first requested my own report. Here’s what usually happens: when you open a store card or purchase a vehicle the loan is often offered through a third-party. For example, the lender might really be Wells Fargo (which shows up on your credit report), although your car loan payment is through the local Chevy dealer.
Scan your debt to determine every penny you owe. If you aren’t sure about a company, call them and find out why you owe them money. In some cases, such as the car example above, you may be surprised.
If you have credit cards listed as “current” and “open” that should be closed, wait until you’ve applied for new debt. Although I like closing unused credit lines, over the short term this will bump down your credit rating. Once you’re finished refinancing debt, I think you should close any open debt you aren’t using. Your credit will rebound quickly if you continue making on-time payments and paying down debt.
In some cases, you may have to dispute a debt. First, call the company in question and ask them to remove the negative report. If they’re unable to remove the report, check with the credit reporting company for the process to dispute the debt. The credit reporting websites lay out clearly what your next steps will be. Dispute all debt that isn’t yours.
What’s a Good Credit Score?
With credit companies tightening their belts after the housing market collapse, the definition of a good score has changed. However, as a general guide, if your score is over 700, you’re in decent shape. A score over 725 is considered very good credit by most. If your score tops 750, you should have little trouble receiving new lines of credit, although the amount will depend on your income and other credit outstanding.
Scores in the high 600s will generally qualify for many credit opportunities, but often at a marginally higher rate than those in the 700s. Don’t stop trying to refinance your debt if you’re in mid to high 600 range. There may be opportunities.
If your score is below 650—and especially if your score is in the 500s or lower—you should work on quickly improving your credit score while rates are low. You may be able to raise it enough to take advantage of this opportunity before rates rise.
To raise your score, do the following:
- Clear any negative reports which aren’t true from your credit report.
- Make on-time payments toward your debt every month.
- If you have over-funded reserves, pay down some debt to increase the gap between the amount of credit you have available and the amount you owe.
Request your credit report and begin cleaning your debt. In two weeks we’ll talk about how to begin refinancing home, auto and credit card loans.
MyFICO.com – Currently, the site lists the score as FREE, but read the fine print. If you don’t want to pay nearly $15 per month for credit reporting, avoid the “free” offer.
Experian – $14.95 buys a one-time look at your score and full credit report. This site also has a $1 advertised score on the front, which comes saddled with a credit monitoring offer.
Transunion – Maybe you can find a way to buy your score without purchasing credit monitoring, but I couldn’t find it.
Equifax – For $15.95 you can order a complete credit report and analysis of your credit history.