Improving Your Credit Score
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 house or refinancing a home loan. 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 get a lower mortgage 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.
The most commonly used credit score is the FICO score, which uses a scale from 350-850 that tells lenders what kind of credit risk you are. A score above 740 is considered excellent credit; 680 or higher is good, the mid-600s are so-so and 620 or under is generally regarded as subprime, though individual lenders may rank them differently. But anything under 580 is going to make it pretty difficult and/or expensive to get a home loan.
Improving your credit score doesn't just make it easier to get a loan. Your credit score also affects the rate you'll pay. And a small increase in your score can make a difference. Lenders vary the rates they charge depending on the borrower's credit score, and they do it in steps. So if one of the steps is at 680 and your score is 676, improving your credit score by five points could knock an eighth to a quarter of a percent off your rate.
How to increase your credit score? There are several ways. Correct any errors on your credit reports that are depressing your score. Establish a credit history if you don't have one already. Pay your debts on time. Keep the balances on your credit cards low and don't take on more debt than you can handle. Don't close out old accounts where you have a credit history. And establish a savings account if you don't already have one.
Here's a closer look at the different ways how you can improve your credit score.
Check your credit reports
The first step in improving your credit score is check your credit reports. These are compiled by the three major 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. To obtain them, use the official web site, www.annualcreditreport.com, which is the one operated by the three agencies themselves expressly for this purpose.
There are a number of other sites that can also provide your credit reports, but charge outright
outright or hidden fees for doing so. These often bundle your credit reports with a credit monitoring service that you pay for.
Once you have your reports, review all three for errors. What you're looking for are errors in reporting your debts or payment history – a disputed charge reported as an unpaid debt, collection actions for debts you did not owe, payments made that were not credited to you, etc. Don't worry about things like outdated home addresses or employers, or misspellings here and there.
Also look for evidence of identity theft – like accounts you never opened or debts you did not incur.
Be alert for outdated information - negative credit information is supposed to drop off your report after seven years, although certain bankruptcies can stay on your file for 10 years 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.
Establish a credit history
How can you increase your credit score if you don't have a credit history to begin with? That's one of the ironies of trying to improve your credit – you need to have credit to get credit.
If you need to improve your credit score because you don't have much of a credit history to begin with, there are several things you can do. Try to find a credit card you can qualify for and make regular use of it, ideally paying off the balance in full each month. After six months or so, try to qualify for another card and switch your activity to that. Then maybe a third card or perhaps an auto loan.
What you're trying to do is establish a number of accounts where you have a record of being in good standing. Each one helps improve your credit score. As you get additional credit cards, you don't need to use them all regularly – in fact, you should try to limit your use to just one that you can pay off every month. But simply having the others in good standing, even if you aren't using them, are each a mark in your favor.
But getting that first loan or credit card can be tough. One option is to apply for a secured credit card, which is backed by money you deposit in an account – usually $500-$1,000. The card lets you charge up to the amount you deposited. The money in the account isn't used to pay the card – its only there as a guarantee – but using the card and paying it each month allows you to establish that first record of credit use. Then you can use that history to apply for a regular card or some other type of loan and go from there.
Pay bills on time
The most basic way how you can increase your credit score is to pay your bills on time. If you've got a few late payments on your record, staying current on your bills can improve your score in a surprisingly short time, as little as 6-12 months.
Note that for credit reporting purposes, a payment isn't considered late until it's 30 days past due – one billing cycle. So missing the due date on a credit card payment by a few days might get you socked with a late fee, but it won't be reported as a late payment unless it isn't received within 30 days.
Don't assume that once a payment is late, the damage is already done. There are different levels of severity for accounts that are reported as 30, 60 and 90 days past due – the latter can knock your credit score down by 100 points or more. And the impact is even worse if the account is turned over for collection. That's a major blot on your record that will take several years to overcome.
Pay down credit cards
One way how you can improve your score quickly is to pay down the balance on credit cards with large balances, or on other consumer debt. This improves your credit utilization ratio, or how much of your available credit you're using.
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 a single card with 60 percent.
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. And avoid the temptation of using cash advances to simply shuffle debt around from one card to another. That not only increases how much you owe through interest and fees, but also shows up as risky behavior on your credit report.
Keep old accounts active
There's a popular but mistaken assumption that you can improve your credit score by canceling credit cards you don't use. It's just the opposite. Closing out any accounts means they'll no longer be reported as part of your credit profile – and unused but active cards are simply reported as being in good standing every month – which helps your credit.
Closing those accounts also means reducing the amount of credit you have available, which hurts your credit utilization ratio. As noted above, credit utilization is how much of your available credit you're using, so closing unused cards means the debt you have will make up a larger percentage of the available credit you have remaining.
You don't want to use too many cards – ideally, you want to limit activity to 2-4 cards where you can pay off the balance each month. And you don't want to have multiple cards where you're carrying a balance over each month. But having a dozen or so cards with a zero balance won't hurt you, as long as you don't have to pay annual fees on them.
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. And it never hurts to start saving for the future.