So how do you go about improving your credit score? Good credit is the key factor in getting the best interest rates when buying a home or refinancing a mortgage. In today's tight credit markets, it even can determine whether you qualify for a loan at all.
Fortunately, there are things you can do to improve a weak credit score in order to qualify for a loan or perhaps shave a quarter or half a percent off your interest rate. Some of them take time, but others can bring your rating up fairly quickly - perhaps just enough to make a difference on the loan you're applying for.
Your credit rating, of course, is that score from around 350-850 that tells lenders what kind of credit risk you are. A rating above 700-720 is traditionally considered good credit, anything in the 600s is regarded as subprime and 620 or below means you may have difficulty getting a loan, particularly these days.
Something to remember that lenders vary the rates they offer based on credit scores, and they usually have specific cutoffs for various rates. So if the cutoff for a prime rate is 720, and your score is 714, bringing your credit rating up only six points could get you a lower interest rate . Request your credit reports
Request your credit reports
The first thing to do is get your credit reports. These are provided by three credit reporting agencies - Equifax, Trans Union and Experian - and by law, you're entitled to a free copy of your report from each every year. You can contact them directly, but the simplest way is to go to www.annualcreditreport.com, a web site sponsored by the three companies expressly for this purpose.
There are a number of other sites with similar sounding names that also provide credit reports, but contain outright or hidden fees for doing so. Once you have your reports, review all three for errors. What you're looking for are reports of late payments that you made, unpaid bills that were resolved, disputed charges that were reported as unpaid - anything that relates to your payment history.
Be also alert for outdated information - negative credit information is supposed to drop off your report after seven years, although bankruptcies can stay on your file for 10 and delinquent tax bills for 15 - meaning that missing your tax payments is one of the worst ways to do long-term damage to your credit.
Report and dispute errors
If you find mistakes related to your payment history, contact the credit agency to dispute the item. Provide copies of relevant documents, including bills, cancelled checks, written correspondence with the business - a good reason for keeping good records.
Also, write to the business that reported you as missing or not making the payment to inform them you disputing the report. Keep copies of all your correspondence. The agency is required to begin an investigation within 30 days; if your claim is borne out, the item will come off your report. This is one of the quickest ways to raise your score.
If you have a single negative report from a business with which you've otherwise had a good relationship over a number of years, you may be able to request that they withdraw the bad report as a onetime favor. Some businesses will do this for good customers; it doesn't hurt to ask.
Pay bills on time
An obvious way to improve your score is to pay your bills on time. If you've been missing payments by only 30 days or so, staying current on your bills can bring your score up in a surprisingly short time, often 6-12 months. Also, don't worry about payments that are a day or so late - your credit report is concerned about payments that are 30 days late or more. That said, don't get complacent about being a few days late on payments - it's all too easy to let a few days turn into 30 before you know it. And don't let any payment become 90 days past due - that's a blot on your record that takes a long time to remove.
Pay down credit cards
One way to improve your score quickly is to pay down the balance on credit cards with large balances, or on other consumer debt. Generally, any credit card on which you owe more than 30 percent of the credit limit is going to hurt your score - it's better to have four cards with balances of 15 percent of your credit limits than one with 60. However, don't take out cash advances to spread the debt around - each of those shows up as a credit inquiry, which can bring down your score, particularly if you apply for a mortgage a short time later.
Keep old accounts active
If you have a number of unused cards lying around, make occasional small purchases with them, then pay them off immediately when the bill arrives. This means those companies will continue to report good things about you to the three credit agencies, rather than reporting the card as inactive, which does nothing for your score.
Also, don't close out unused cards - financial experts recommend that consumers limit themselves to 2-4 credit cards, but once you've got one, closing it out will only remove any good credit history that you have with it from your report.
Open a savings account
Finally, if you haven't done so already, open a savings account. Usually, this doesn't require keeping a large balance, but just the fact that you have the account shows up as a positive on your credit report. Although it doesn't hurt to start saving for the future.