Improve Your Credit Score

Credit reports are used by banks, credit card issuers and automobile dealerships to help them determine whether or not you are a good risk and if you are likely to repay any loan taken out. Also, many potential employers and landlords check your credit score to find out about your past credit history. There are some very simple steps you can take to raise your credit rating, as well as many things you can do to avoid having your credit score decline in the future. Note: This article applies to the United States. While some of the information here is relevant for other jurisdictions, check with your relevant local sources to verify first.

Steps

Understanding Your Credit Score

  1. Learn how your credit score is calculated. There are three national credit bureaus TransUnion, Equifax and Experian that calculate your credit score, and your score can differ depending on the agency, as they may have differing information about your credit history.[1] There are five major components to your credit score. Each of them is weighted differently.[2]
    • Payment history (35%) — The most important component of your credit score is your payment history. Do you pay your bills on time? Do you have a history of late payments? If so, how late? Have you ever been turned over to collections? You can expect that late payments will deduct points from your score.
    • Amounts owed (30%) — What's your overall debt load? If you've taken on too much debt, then your score could suffer.
    • Length of credit history (15%) — How long is your record when it comes to managing credit? If you're brand new to the scene, then lenders will view you as a risky borrower when compared against someone who's been paying off debt for decades.
    • New Credit (10%) — If you've just taken out a bunch of new loans and/or opened credit card accounts recently, your score is going to take a hit.
    • Types of credit (10%) — A healthy mix of debt (a mortgage, a credit card, and a car loan) is viewed a little more favorably than debt consisting entirely of credit cards. However, you don't want to open a new credit account just to have "balance." Instead, focus on the other components of your score.
  2. Know how your credit score influences loans. When you are looking to take out a loan, perhaps for a mortgage or to buy a car, lenders are going to look at your credit score to help them determine if you are a good risk[3] — meaning, you will pay back the loan. They will also use your credit score to help them determine the the interest rate on a loan. If you have a high credit score, you will likely qualify for lower interest rates.[4] A low score may mean a higher interest rate, or even being denied a loan.
    • Different lenders may use industry-specific scores. For instance, a credit card company may look at your FICO Bankcard Score, or an auto lender may order your FICO Auto Score, to give them a more specific look at your relevant credit information.[5] When applying for a personal loan, student loan, or mortgage, your credit score from all three bureaus may be examined.[5]

Studying Your Current Report and Fixing Errors

  1. Request your credit report and score from the three national credit bureaus. The contact information for TransUnion, Equifax and Experian can be obtained online at their websites or from the Credit Info Center. The first thing you need to do is know where you are now, in order to fix any errors and determine where you need to improve.[6]
    • The information on the credit report is the data used to develop the credit score, so ensuring the information is correct is critical.
    • You can obtain one free credit report per year from each of the three agencies. Therefore you should request one report every four months so you can continually monitor your reports. Your credit history is free but you may have to pay a small cost to get your actual credit score. Some banks and credit unions offer credit score information to their customers for free.[7]
    • Many services that advertise that they will give you a free credit report or score are scams. They will stand there between you and the credit companies in order to harvest your data and then sell the data to marketing firms.
    • You're considered to be a poor risk if you have a credit score under 620.[8]
  2. Dispute items on your credit report that are incorrect. You will have better luck if you deal directly with the vendor who reported the incorrect information than depending on the credit bureaus to take your word for it. For example, perhaps you paid off a car loan but this was never reported to the bureaus as paid by your bank. The bank should then report the correction.
    • For other types of reporting errors such as fraudulent use of your identity, provide all the forms of proof that you have to the bureaus, such as cancelled checks, stamped invoices, police reports, etc. Put everything in writing and follow up at least once per week by phone with the bureaus until the mistakes are corrected on your report.[9]
    • If you have some late payments showing on your credit report, these can really hurt your score. Collections, judgments and tax liens are devastating. You can try to negotiate with the entity that reported the collections, etc., for removal of such negative notations.
    • Be aware that unlike what you may have heard or read elsewhere, getting negative information removed from your report is not an easy thing to do. Be persistent, factual and patient.

Repairing a Poor Credit Score

  1. Make a budget and stick to it. Creating a budget, either written or online, will help you get rid of your debt, improve your credit, and stay out of debt. While the credit bureaus won't see your budget, it will see the good results of your sticking to it.[10]
  2. Get out of debt. Getting rid of as much of your debt as you can is the first and most important step in improving your credit. Make a list of all debts and prioritize which ones to pay off first.
    • Try the avalanche technique. To pay your debts off as quickly as possible, start by paying off the debt with the highest interest rate first. Continue to pay off your debts, working your way down from the highest interest rates to the lowest.
    • You can also try the snowball technique. With this method, you pay off your smallest debt first and work your way up. This is not always the most efficient way to pay off your debts in terms of saving money, but the sense of accomplishment that comes with successfully paying off a debt, even a small one, can help motivate you to keep at it.
    • To remove the temptation, "retire" of some of your credit cards as you pay them off. Too much credit can be a bad thing. Closing credit accounts can have a negative effect on your credit score; a better solution is to pay off excess cards and stop using them without closing the account. Cut up the card so you won't be tempted to use it.
  3. Apply for a secured credit card. If you are having trouble getting credit due to a poor credit score, or you are a first timer, apply for a secured credit card from your bank. This type of card uses money in your savings account as security. This is an easy way to establish a great credit history.)
  4. Refinance loans as appropriate. Note that "paying off" loans increases your score. Oddly enough, occasionally refinancing your mortgage and trading in cars with loans on them "pays off" loans, too. If you do refinance, do it for no points and a lower rate.
  5. Contact the lender if you cannot make payments on time. If you experience a job loss or other misfortune, contact your lenders right away. The worst thing you can do is ignore them. Explain your financial situation and agree on a new payment schedule that you can manage. Get the agreement in writing and ask them to include a note that your payments will not be reported as late.
  6. Build up different types of credit. A "healthy mix" of different types of credit builds up your score better than simply one type. For example, you might have a car loan, mortgage or line of credit and a credit card.
    • Let's say two people have $10,000 total in total credit each, and both are making timely payments. One has only one credit card. The other has a credit card, a car payment and a bank line of credit (overdraft protection). The second person's score will often be much better than the first one's.
  7. Meet with a credit counseling agency. If you need any kind of advice to help get out of debt and improve your credit history, find a find a low or zero cost agency to help you. There might be free services available from your employer, military base, credit union, housing authority, or a local branch of the U.S. Cooperative Extension.[11]
    • Beware of for-profit companies that charge you a fee and promise to have all or most of your debts forgiven. Even if they pull it off, your credit score will plummet.

Maintaining a Good Credit Score

  1. Pay your bills on time, regularly. This is absolutely essential to better your credit score. Each late payment dings your credit score and presents a picture of unreliability. You must determine that, going forward, you will be paying your bills on time. The biggest chunk of your credit score is based on your payment history.
    • Never bounce a check. This along with late payments will stay on your credit report for seven years. Ask your bank for a small amount of reserve credit that will cover any “insufficient funds.”
    • Pay at least the minimum amount due each month plus $10. Make sure the payment arrives at least one day before the due date.
    • Keep in mind that late medical bills and apartment rent are generally not reported to the credit bureaus (although you do need a place to live).
    • It's much easier to keep track of due dates if you pay your bills online through your bank. Then you can schedule payments for any date even if it's not due for a few months. Plus you’ll have written proof that the payment was made on time, and you won’t have to worry about delays in the mail.
  2. Reduce your debt to credit ratio. The next big chunk of your score after your credit history is determined by the balance on your available credit. Seek to keep your balance for each card at approximately 30 percent of the limit, or less. This means that if your credit card limit is $1000, you should aim at having a balance of not more than $300.
    • Ask for an increase in your credit limit for the cards you currently have if you have used over 30% of the current limit. But don’t spend it!
    • Having high available debt and low indebtedness helps a lot. In other words, if you have lots of available credit (credit cards you don't use), and little or manageable debt, that looks better than being in hock up to your eyeballs, or just having no established credit at all.
    • If you pay off your credit cards in full anyway, consider paying them off a day or two before the billing cycle is closed (check online or on your statement for the day, and the current total). That way, your bill will show a very small or even negative amount, which gets reported to the credit scoring institutes. This increases your credit score up to 50 points (if everything else is unchanged).
  3. Resist responding to "pre-approved" credit card offers. These come by mail or are sent to you online. It's easy to think, "What can it hurt to apply? They say I'm already approved." The reality is that each time one of the national credit bureaus receives an inquiry from a credit card company, your score goes down a few points.
    • This includes store card accounts; the less you have, the better.
    • The fact that frequent checking harms your score also means that you need to avoid checking your score compulsively.
  4. Take advantage of 0% interest offers. It can be to your advantage to transfer a current balance to a 0% interest card for a period of time, sometimes as long as a year. But don't close the old account. Your credit history looks better to the credit bureaus if you have long-standing, established accounts. This looks good even if many of your accounts are never used anymore.
    • Taking advantage of these 0% offers outweighs the disadvantage of the credit card company making an inquiry to the credit bureaus.
  5. Be stable. There are several ways to impress the stability of your life on a credit score reviewer. While these may seem less important than other factors, it all helps to raise your score:
    • Buy your own home. Owning a home is viewed as considerably better than renting one. Although affordability of housing has changed in recent years, owning a home is still within the reach of many who save regularly and spend within their means.
    • Avoid moving around a lot. If you physically reside at the same address for a long time it is better for your credit history than if you move frequently.
    • Get married. If you examine two people with very similar credit histories, the one who is married will have a markedly higher credit score than the single person. Strange, but true!
  6. Age is another personal characteristic that the credit bureaus factor into their ratings. Older is better. Even though you cannot magically increase your age, it is nice to know that as time goes by, your credit score automatically improves.

Tips

  • When you apply for a loan, you can demand a copy of the credit report right then. They will usually offer it to you anyway.
  • Once your credit scores have been boosted, try to keep them there. With careful planning you'll never have a poor credit score again.
  • The Fair and Accurate Credit Transactions Act (FACTA) and the Fair Credit Reporting Act (FCRA) say you are entitled to a free annual credit report.
  • The official site formed by the credit reporting agencies to check your credit report is at: http://www.annualcreditreport.com/
  • Equifax and Experian will both let you check their reports directly from their own web sites. TransUnion makes you join a 'trial service' that lets you keep looking at the same report for 30 days, but it's a "do nothing and join" service, so you'll need to cancel it instantly after you get your report, lest you forget and begin getting billed $10/month for the privilege of routinely seeing that which doesn't change very much. (See 'External Links'). If you come through the official http://www.annualcreditreport.com/ site, you don't need to cancel anything.

Things You'll Need

  • Online access to relevant credit bureaus
  • Proof of errors, inaccuracies or identity theft

Related Articles

Sources and Citations

  1. ↑ http://www.consumerfinance.gov/askcfpb/319/how-does-my-credit-score-affect-my-ability-to-get-a-mortgage-loan.html
  2. ↑ http://www.investopedia.com/articles/pf/10/credit-score-factors.asp
  3. ↑ http://www.myfico.com/CreditEducation/How-Lenders-Use-FICO-Scores.aspx
  4. ↑ http://www.consumerfinance.gov/askcfpb/319/how-does-my-credit-score-affect-my-ability-to-get-a-mortgage-loan.html
  5. ↑ 5.0 5.1 http://www.myfico.com/CreditEducation/FICO-Score-Versions.aspx
  6. ↑ http://www.creditinfocenter.com/creditreports/CreditBureauContactInfohtm.shtml
  7. ↑ http://www.myfico.com/CreditEducation/CreditScores.aspx
  8. ↑ http://www.howcast.com/videos/125631-How-To-Strengthen-Your-Credit-Score
  9. ↑ https://www.annualcreditreport.com/index.action
  10. ↑ http://www.consumercredit.com/financial-education/budgeting.aspx
  11. ↑ http://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111
Retrieved from "https://kipkis.com/index.php?title=Improve_Your_Credit_Score&oldid=311854"