How to use your stimulus check to boost your credit scores
If you have received a check from the government as part of the most recent pandemic stimulus legislation, but are fortunate enough not to need the entirety of that payment for rent or other bills, you may want to consider investing all or part of that payment in improving your credit.
A higher credit score can provide you with important opportunities like the ability to obtain financing to buy a new home or a new car. It can also save you money throughout the year on your insurance premiums and credit card interest rates.
Here are some suggested ways to use the stimulus payment to help boost your scores:
1. Get a Copy of Your Credit Report
The very first thing that you should do is to obtain a current and complete copy of your credit report. Obtaining your report doesn’t even have to cost you any of your stimulus money. Because of the pandemic, from now until April of next year, you can obtain a copy of your credit reports from each of the three credit bureaus at annualcreditreport.com.
You can obtain these reports once per week, without paying a nickel. Unfortunately, this site will not provide you with your credit scores. You can get your credit scores from internet sites like Credit Karma, but be advised that the scoring model used by many of these sites (Vantagescore) is not the same credit scoring model that is used by most lenders.
Once you are in possession of your reports from all three of the national credit bureaus (Experian, Transunion and Equifax) review them carefully to make sure that the information that they contain is accurate. Also, look for items that are reporting as derogatory. These items might include high credit card utilization rates, charged off accounts and collection accounts.
2. Pay Down Your Credit Card Balances
Credit utilization is one of the biggest factors used in calculating your FICO credit score (This is the credit scoring model used by most lenders). Credit utilization, in its simplest terms, is a fraction. The amount of credit that you are using is the top number (numerator) of the fraction and the limit on your credit account is the bottom number (the denominator.) Credit utilization is measured by the credit scoring algorithm as a means of seeing that you use credit, but you use it responsibly.
Ideally, the FICO credit scoring formula looks for you to utilize 30 percent of a credit card’s limit or less.
So, take some or all of your stimulus money and pay down any credit cards you have where the balance is in excess of 30 percent. Do so, and you can expect to see an increase in your credit score in a very short time.
3. Fund a Secured Credit Card
If you are able to access your credit scores, you may be surprised that you don’t have a score actively reporting on one or more of the credit bureaus.
This is a likely indication that you are “credit invisible.” Why is your credit invisible? Most often it is because you have never applied for credit. It can also be because you have not applied for or utilized credit in the past seven years. Generally, a FICO score is only generated for a consumer if they have at least one “trade line” (what the credit industry calls accounts like credit card accounts) that has been open for a minimum of six months.
One of the easiest ways to become visible to the credit bureaus is to obtain a “secured” credit card. Secured cards are guaranteed by a deposit that you make with the bank where you acquire the card. Since the card is secured by your deposit, the card issuer doesn’t care about your credit score. (They typically don’t even run your credit) If you default on the card, the card issuer simply takes your deposit. Your credit limit on a secured credit card, typically, is equal to the amount that you fund the card with.
There are a wide variety of secured credit cards available, and the amount of money that you are required to deposit to fund those cards varies, many of these cards only require a deposit of two or three hundred dollars.
Shop around and be certain that you understand what you are getting and paying for with this type of card. It is crucially important that you manage this card properly in order to effectively build your credit score.
4. Pay Off Collection Accounts or “Charged Off” Accounts
Would you like to stop getting calls from that collection agency that keeps calling about some bill that you were unable to pay several years ago? Getting those calls to stop is another great way to use your stimulus money, by paying off or settling those obligations. It may also help to boost your credit score.
Be careful when negotiating payment of old debts, as sometimes making a payment on them can re-trigger statutes of limitations. Statutes of limitations are the time period, set by state law, during which a creditor can sue in court for an unpaid debt. They vary from state to state, so be sure that you know the statutory period for your state. By partially paying a debt or entering into a payment plan, it’s possible that you may “restart” the statute of limitations all over, even if the debt has been previously barred by the expiration of said statutory period.
You should also be aware, federal law only allows collection accounts to be reported for a certain period of time. This restriction almost always differs from the statute of limitations, it may be either longer or shorter than the statute of limitations..
Believe it or not, whether you pay an account in full or enter into an agreement with the collection agency to settle the account for less, won’t make much of a difference in your credit score. Accordingly, feel free to try to negotiate a “settlement” of your debt with the collection agency that is attempting to collect it.
Finally, be aware that paying off an old account doesn’t necessarily mean that it will be removed from your credit report. Depending upon how old the collection is, paying it off may not help your credit score at all.
5. Hire a Qualified Professional Credit Restoration Company
You can certainly attempt to fix damaged credit issues on your own. The process can be hard work. It will require your time, patience, diligence and perhaps some aptitude for understanding what the credit bureaus and collection agencies are required by law to do.
You may want to consider spending a portion of your stimulus payment on a professional, reputable credit restoration company to assist you along the path to better credit. A well-qualified credit restoration company will provide you with important guidance as to how to identify and address negative items that appear on your credit report, help you to maximize your credit utilization, teach you how to acquire and properly utilize a secured credit card, and help you with negotiating collection accounts.
The credit restoration company that you choose should also be reasonably priced. This will allow you to use only a portion of your stimulus check to pay that company’s fees while leaving enough money remaining that can be used to do things like obtain a secured credit card or pay off derogatory accounts.