Excellent credit scores unlock a host of benefits and affordable financing options. They unleash the amazing benefits of best credit cards, get you lower costs insurance premiums, and even get your lower cost cell phone plans. And of course, help you to reduce your financing costs when paying for college. Sooner or later we all need a big ticket loan and borrowers with the highest credit scores are generally secure the lowest interest loans, including private student loans.
Since it is in your interest to have a great credit score, let’s review some ways to keep or improve your existing credit score.
1. Review your Credit Report for Accuracy
According to a Federal Trade Commission (FTC) report, one in five people have an error on their credit reports. In fact, when the FTC reviewed consumers disputing errors where the credit reporting modified the data, 13% of these consumers experienced a change in score due to their dispute. Can you imagine how many more people could increase their credit score by reviewing their data and disputing any errors? You in fact may be on those people, so get your latest credit report and check it out. In fact each year, you are eligible for one free credit report from each of the three nationwide credit reporting companies (Experian, TransUnion, and Equifax). The FTC walks consumers through the process to dispute an error on your credit report. It's easy to get your credit report now to get you ready for paying for college.
2. Clear Up Any Negative Activity
If you discover that you have negative activity on your credit report that has an unfavorable effect on your credit score, then clear it up. For some, this means paying off debt that is in collections. This will help, but most often the activity will still appear on your report for a little over 7 years. If you are working with a collections agency, try to negotiate having it removed from your report.
For others, late payments can be the issue. Late payments can be reported for up to seven years from when the delinquency occurred. This may mena it will take time and good repayment habits to reverse your credit score trajectory. If you realized that you were late on a single debt repayment, it’s worth calling the company to ask if they will refrain from reporting it once your payment is processed. If you were serially late on payments, then the company will report this habit to the credit reporting agencies. Do what you can to clean up this negative activity before you pay for college.
3. Build the Age of Your Revolving Credit
Did you know that the length of time that you have a revolving credit like a credit card affects your credit score? Yep, it does. When you have a long track record of on-time repayment, future and lenders and credit card issuers love it. This can help you to reduce the cost of financing for paying for college.
4. Keeping Credit Usage in Check
Just because your credit card company issued you $40,000 in credit limit, doesn’t mean you have to use it. The rule of thumb is to use no more than 30% utilization on any one card at one time. So in this example, you shouldn’t use more than $12,000 of your credit limit. Many experts suggest that if you need more credit, then spread it around multiple credit cards but just ensure that you don’t exceed the 30% utilization threshold. If you really need access to credit on a specific credit card beyond the 30% utilization level, then request the credit card company to increase your limit. Many companies will be happy to accommodate your request.
5. Limit Your New Credit Applications
Every time you want to open a new form of credit, the company pulls a credit report, also known as a hard inquiry or hard pull. Although there are several credit score formulas, experts report that new applications can make up 10% of your credit score. If you have one new credit application inquiry, you are not likely to lose many credit score points. However, if you multiple new credit applications that are hard inquiries in a short period of time, you can be looking at a significant drop in your credit score. If you are shopping around for a mortgage, car, or a student loan to pay for college, limit your shopping period to two-weeks. Most often, the credit reporting agency will count all the applications as a single hard inquiry.
It’s a good idea to monitor your credit. There are easy ways to do this like rotating credit report agencies every four months to request your free credit report. Some people use free services like Credit Sesame that alert you to changes in your credit score. While others want more specific and actionable credit monitoring, There are a number of companies that mix credit monitoring with other privacy and identification protection services.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.