You need to get your credit score to at least 740 in today’s economy.

If your credit score is not a 740 or higher, you will pay more for things like home loans, auto loans, credit cards, insurance. The extra costs of all these things will make it very difficult to have extra money left over.  A lower credit score is like a stealth tax that takes away your ability to save more, spend less, and possibly, even earn more.

The main reasons people have lower than a 740 credit score:

1. High balances on credit cards
2. Late payments
3. Collection accounts from old medical claims
4. Collection accounts from utility bills that their college roommate was supposed to pay
5. Not establishing credit

Ongoing things to do:

• Keep your credit card balances as low as you can
• Keep your credit limits high – don’t close accounts, and don’t lower your limits
• Pay your bills on time

If you have old collection accounts, touching them is going to hurt your credit.  If you aren’t planning any major borrowing in the next year, let’s go ahead and clean them up.  Paying off an old collection account will not immediately improve your score, in fact, your score will likely drop for a few months.  The credit scoring model treats recent derogatory credit more harshly than old stuff.  So, if you pay off a collection, it makes it appear recent and brings down your score.

Even if “it’s not your fault”, paying a collection that your old insurance company or roommate was supposed to pay, is far better in the long run than being right.  Take the hit, write the check, and over time, that old collection will fade from memory, and more importantly, from your credit report.

If you are thinking of buying a house or car this year – don’t touch old collection accounts! Stirring up the past will lower your score and will cost you more to borrow.  Make the important purchases first, then go back and clean up the old stuff on your credit.

When people tell me they “are working on their credit”, I usually wince, as what they are doing is hurting them.  People normally close accounts (Bad), pay off old collections (bad), and lower limits on existing credit cards (bad).  If you need to “work on your credit, have a mortgage professional who understands the credit scoring model help you create a plan for success.  Call me if you want to talk it over and don’t have someone else to work with.