Whether you are buying a house, getting a car loan, applying for a new credit card, or even looking for a new apartment, your credit score matters…a lot.  Having a poor credit score can cost you tens of thousands or even hundreds of thousands of dollars over the course of your life, so you need to know how to get yourself on track and improve your credit score.  In this article, we will look into how to check your credit report, identify problems and fix those problems. We will also see how you can improve your credit score and review specific actions you can take to start getting your score as high as possible.

You can get a good general overview of your credit score by checking out free credit monitoring websites like Credit Karma or Credit Sesame.  Once you find out your credit score, you need to know if it is good score or not. To get an idea of how good your score is, you can think of credit scores as falling into these main categories:

  • Excellent credit: 750+
  • Good credit: 700-749
  • Fair credit: 650-699
  • Poor credit: 600-649
  • Bad credit: below 600

Make sure you read my article, “What Makes Up Your Credit Score”, to learn about the factors that determine your score in the first place. That article goes hand-in-hand with this one and will give you a good perspective on the factors that go into increasing your credit score.


STEP ONE: CHECK YOUR CREDIT REPORT   

Since your credit score is determined by the information found in your credit report, you first need to make sure that the information found in you credit report is accurate.  It is not at all unusual to have errors in your credit report. It is estimated that at least one out of every five consumers has at least one error in their credit report. These errors make the consumer look like more of a credit risk then they really are.  This is a huge problem and can end up costing you loads of money if you don’t fix these errors.

To get a copy of your credit report, go to annualcreditreport.com (requesting your own credit report will not lower your credit score).  Look over your credit report carefully and check the following:

  • Make sure your personal information on file is correct and up to date.
  • Check that all of your credit accounts are listed.
  • Check that there are no accounts on the report that were not opened by you.
  • Make sure there are no missed payments that you know you made.
  • Check that there are no other derogatory marks (collections, bankruptcy, foreclosure, tax lien, etc.) that you know are not accurate.

If you do find an error, you need to take action to fix it as soon as possible.  Fixing errors can be time consuming, but you need to find the time to do it. Errors can stay on your credit report for a long time if you ignore them.

HOW TO FIX AN ERROR ON YOUR CREDIT REPORT

To fix an error on your credit report, you should file a dispute by contacting the credit reporting agency that is reporting the error (Transunion, Equifax, or Experian).  They are required to open an investigation to determine whether or not the disputed information is accurate. After the investigation is complete, they will inform you in writing of the results.

You should also directly contact the creditor associated with the error and dispute it with them.  For example, if you notice that there is a Citibank credit card on your credit report that you never opened, you should call Citibank and get the error corrected directly with them, in addition to the credit reporting agency.

HOW TO IMPROVE YOUR SCORE

Okay, now that you’ve corrected any errors on your credit report, it’s time to get to work improving that score!  We are going to go through each of the five factors that contribute to you credit score, and discuss what you can do to improve your score in each of these five areas.

PAYMENT HISTORY

Your payment history makes up 35% of your credit score.  This is the category with the biggest impact on your credit score, so it’s extra important to get this right.  Unfortunately, there is no quick fix for a poor payment history. You can’t change the past, so the best thing you can do to improve your credit score in this area is to develop good habits with paying your bills in the future.  

If you’ve been missing payments on your debts, it will take time for those missed payments to leave your credit report.  A missed payment stays on your credit report for 7 years, but has less of an impact on your score as time goes by.

What you can do:  

  • Always pay your bills on time.  Establishing a history of on time payments has the biggest impact on increasing your score.  The longer your history of on-time payments gets, the more your score will improve.
  • Pay off any past due balances now.  Even if you are late on a payment right now, you can minimize the damage it will do to your credit score by paying it off ASAP.  The later you are on a payment, the more it lowers your credit score.
  • Set up bill due-date reminders so you never forget to pay your bills.
  • Automate your bill payments.  Most creditors will let you set up auto-pay for your monthly bill.  This way, you can’t accidentally forget to pay one of your bills.

AMOUNTS OWED

Your amount of debt makes up 30% of your credit score.  This is another very important factor when it comes to improving your credit score. Unlike payment history, this category can be cleaned up faster, but improving this part of your score will require a lot of financial discipline.  You’ll need to make a budget that places an emphasis on debt repayment and stick to it.

Your goal for improving your score in this area is to reduce your credit utilization ratio.  That means, you want to decrease the amount of your debt relative to the amount of your available credit.

Credit utilization ratio = amount owed ÷ available credit

The goal here is to at least get your credit utilization to less than 30%.  If you can get it below 10%, that is ideal. Paying off as much of your revolving credit, like credit cards, is especially important.  In this category, debt on revolving credit is weighted more heavily than other types of credit debt.

What you can do:  

  • Keep your balances on revolving credit low.  
  • Pay off as much existing debt as possible instead of continually shuffling it around from one account to another.  A good example of this shuffling could be a 0% balance transfer credit card.  This type of account is a great tool to minimize your interest costs while paying off credit card debt, but make sure you are actually paying off your debt and not just putting it off.  A 0% balance transfer card can be a convenient excuse to delay paying off your credit card debt.
  • Don’t close old credit card accounts after you pay off the balance – it can hurt your credit score.
  • Don’t open a bunch of credit cards you don’t need in order to increase your available credit.  This is a common technique used to decrease the credit utilization ratio, but it often backfires and actually lowers your score.  When you are trying to improve your score, only apply for new credit when you need it. Opening multiple credit accounts over a short period of time can lower your score.

LENGTH OF CREDIT HISTORY

The length of your credit history makes up 15% of your credit score.  A longer history of managing credit will help to increase your credit score.  As you might expect, the secret ingredient here is time. The longer you have a history of using credit responsibly, the better this part of your score will be.  

While there is no substitute for building your own credit history, there is one shortcut in this category: you can become an authorized user on somebody else’s credit card account.  If you have a parent or spouse with a longer credit history and a strong history of making on-time payments, you can increase the length of your credit history quickly by being named as an authorized user on their account.  The primary account holder just has to contact their credit card company and ask to add an authorized user to the account.

What you can do:

  • Use your existing credit accounts and pay your bills on time to increase your length of credit history.  This takes time, but it’s the main way you can improve this portion of your credit score.
  • If you don’t have a long credit history, it is especially important not to start opening a lot of new credit accounts over a short period of time.  This will shorten the average age of your credit accounts and make this part of your score even worse.
  • Don’t close old credit card accounts that you no longer use – this will decrease the average length of your credit history and hurt this part of your credit score.
  • Become an authorized user on someone else’s credit card account.  Make sure the primary account holder has a longer credit history than you and a strong history of on-time payments.

CREDIT MIX

Your mix of credit account types makes up 10% of your credit score.  This portion of your credit score will be higher if you have a diverse mix of multiple credit account types, including:

  • Credit cards
  • Retail credit accounts
  • Installment loans (like a car loan)
  • Mortgages

Ideally, you will want to have a somewhat diverse group of credit accounts in order to maximize your score in this category.

What you can do:

  • Have credit cards and use them.  But make sure you always pay your bill on time.  Making your payments on your credit cards will help rebuild your score.  If you have no credit card at all, your are viewed as more risky and it can hurt your score.
  • Don’t open credit accounts just to have a better credit mix.  This probably will not increase your score and may backfire.  Only open new credit accounts when you need to. Over time, your credit mix will improve as you take on different types of credit.

NEW CREDIT

This makes up 10% of your credit score.  The new credit portion of your score is determined by the number of new credit accounts you’ve opened, or attempted to open recently.  Opening a number of credit accounts over a short period of time will have a negative impact on your score.

The goal here is to avoid applying for a lot of new credit over a short period of time.  If you are suddenly applying for a lot of credit, it signals to lenders that you may be in financial trouble and are trying to cover your expenses with new credit.  This makes you look like a more risky borrower.

When you apply for new credit, the lender checks your credit history.  This type of credit check is known as a “hard inquiry” and it can lower your credit score.  But hard inquiries will only have an affect your credit score for 1 year after they are made.

When you apply for a mortgage or a car loan, you will probably shop around with multiple lenders to see who will give you the best interest rate on your loan.  This is known as “rate shopping” and it results in multiple hard inquiries on your credit file.  But don’t worry, as long as you do your rate shopping over a short period of time (about 30 days), all of those related hard inquiries will be recognized as rate shopping and will only count as one hard inquiry.

What you can do:

  • Only apply for new credit when you really need it.  Applying for lots of credit over a short period of time will decrease your credit score
  • Do your rate shopping over a short period of time to make sure your credit file doesn’t get hit with lots of hard inquiries. Shoot for doing your rate shopping over a period of less than 30 days

QUICK SUMMARY

The most effective ways to increase your credit score are:

  1. Always pay your bills on time.
  2. Keep the balance on your credit card accounts low.
  3. Only apply for new credit when you need it.
  4. Avoid closing old credit accounts, even if you don’t use them regularly.
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2 Responses

  1. Alma Langrum says:

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