Posted : 03/27/2013
Your credit scores help to determine what you pay for credit, loans and car insurance. Landlords check them. So do many employers.
But 96 percent of Americans don't even bother to review an annual credit report, according to a recent study, even when they can do so for free.
Even worse, the Federal Trade Commission report on credit showed that one in four consumers had errors on their credit reports that could affect credit scores. Five percent of consumers had errors that could lead them to pay more for their car insurance and financing.
Studies by federal and state regulators, universities, independent auditors and insurance companies show that your credit score not only predicts your likelihood of making a claim but also the potential cost of that claim, according to the Property Casualty Insurance Association of America. Drivers with a low credit score are more likely to get in an accident than someone with a high score. (See: "How car insurance companies set rates.")
According to credit analyst FICO, credit-based insurance scores are calculated using information on your credit report, such as how many times you've paid a bill more than 60 days late, to evaluate whether you are more or less likely to have a claim in the future. If you are less likely to have claims, then your premium may be lower. Note, however, that in California, Hawaii and Massachusetts, insurance companies are not allowed to use credit scores to set car insurance rates. (See: "Understanding state minimum car insurance requirements.")
Anthony Sprauve, spokesperson for FICO, says you should order free credit reports from the three credit reporting agencies (Experian, TransUnion and Equifax), but not all at the same time. This should be done through AnnualCreditReport.com every four months over the course of a year rather than requesting all three at once in order to monitor your credit regularly.
"If you find a mistake, you should take steps to correct it at once," says Sprauve.
Identity theft is another good reason to regularly check your credit report, says Paul Oster, CEO of Better Qualified in Eatontown, N.J.
Oster says that most companies use risk-based pricing, so fixing your credit score can lower your interest rates on several bills. (See: "Credit scores and insurance: if you don't succeed, try again.")
He says many people are paying higher interest rates on their insurance, mortgage, car loan and credit cards. Even if it's just a little bit extra in interest on each bill, that can end up costing you $100 or more in total every month, he says.
Each credit reporting agency explains how to fix an error on its website, but Oster says this can be a time-consuming.
"Be prepared for a complicated process," he says. "Keep excellent records and make sure all mail is sent certified with a signed receipt requirement so you can prove you've sent the materials as needed."
Oster says the "magic number" these days is a credit score of 740 to get the best rates on all financing.
Start by correcting errors on your credit report and then take these steps to improve your score:
1.Pay your bills on time. Sprauve says payment history counts for 35 percent of your FICO score.
"A one-time, 30-day late payment could shave up to 100 points off your credit score," says Oster.
2. Keep your credit card balances low. "Anything below 20 percent of available credit is good," says Sprauve. "The amount owed on revolving credit counts for 30 percent of your FICO score."
Oster says the credit bureaus don't care about your income; they just want to see a low utilization ratio between your credit limit and your balance.
3. Monitor your credit history. "The credit bureaus look at how long you have had an open and active line of credit," says Oster. "Even though it might be a good thing to do financially, the worst thing you can do for your credit score is to close your credit card accounts. Not only do you lose your credit history for that card, but your overall utilization ratio goes up."
4. Don't open new accounts in quick succession. "FICO research shows that opening several credit accounts in a short period of time represents a greater risk, especially for people who don't have a long credit history," says Sprauve.
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