In a previous article we discussed the various types of credit rating systems and what they all mean. We also discussed how credit scores are calculated in our second article. So, now you are probably asking, “What can I do about my score?” The good news is that there are many things you can do to help your score, but there are also many myths and “quick-fix” schemes that simply don’t work.
Many of our customers ask how to improve their score when they really mean, “How can I get out of debt?” This is an important distinction that will determine what you should be doing. Getting out of debt or just improving your credit usage ratio (the amount of money you owe vs. the total amount of credit you have available to you) will certainly improve your score, but if getting out of debt is your true goal, then that is what you should focus on.
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Things like creating a budget and sticking to it, use of “debt stacking” methods, controlling your spending and other similar actions are all good things to do to get out of debt, but we will revisit these in more detail in a later article.
So let’s get back to improving your score. The first thing to realize is that there is no “easy” or “instant” fix for your credit score. Anyone promising this (especially for a fee) is likely to be a scam. But there are things you should do now.
Low Hanging Fruit
The first thing you should do is get the most recent copy of your credit report. There are many places to get it. The only place to get a truly free copy of your credit report is at Annualcreditreport.com. But there are many other sources to get your credit report for very little money (like $1!) if you sign up for a free trial of credit monitoring. It is also important to note that you can’t get a free score at Annualcreditreport.com, you can only get a free report once per year from each of the three major Credit Reporting Agencies (CRAs), and you have to apply for each one separately. So, many people find the alternative credit reporting companies more convenient even if they may slightly more costly.
However you retrieve your credit report, review it for accuracy. Many consumers still find inaccuracies on their credit reports these days, so review it carefully, and, if you don’t recognize something or you believe that something is in error, you should contact the CRA that is reporting it directly and file a dispute. You can also contact the creditor that filed the information and speak with them. Either way, you should clean up anything that isn’t true. Remember, negative information, if factual, cannot be removed.
Longer Term Strategies
The next step is to determine what seems to be affecting your score the most. As we explained in The Anatomy of a Credit Score, your credit history makes up a large portion of your score. If you have only had a credit account (such as a credit card, or a student loan) for a short period of time, this is likely to have the largest effect on your score. To “fix” this, you simply have to keep your accounts open for a longer period of time (and make your payments on time!). A common myth is that you have to use your credit card in order to build credit. That is simply not true. Having a credit card that you don’t use will build credit history over time which is why, in some cases, it is a bad idea to cancel an unused credit card – if you want to improve your score. You don’t get penalized for canceling your account – you just stop building credit history.
Maybe you have sufficient credit history (you can’t have too much!), but you carry high balances. This can push your score down. Add up all the balances you owe and divide it by the total of all your credit limits. This is your credit usage ratio. It is generally advisable to keep this ration below 30%. Try to keep each of your accounts below 30% as well- especially with credit cards and other revolving credit accounts such as department store cards. Auto loans, home loans and similar accounts are, of course, harder to keep below this threshold which is why it important to consider all of your accounts together as well as individually.
Keep making your payments on time! This probably the single most pro-active thing you can do to maintain a respectable credit score. Your bank or credit union may offer payment reminder services through text messaging or email that can help you make your payments on time each month. You might also consider setting up automatic payments either through your credit card providers and other creditors or through your bank/credit union.
If you have derogatory items on your credit report, such as late payments, there isn’t a whole lot you can do about them (unless they are not factual). Collection accounts and bankruptcies also hurt your score and will remain on your report from seven to ten years! Note that paying off a collection account 9or any account for that matter) will not remove it from your credit report – it will remain on your credit report for seven years.It is best to avoid these situations if you can. Sometimes you can work with your creditor or collection agency and work out a deal to correct the issue and, in rare cases, even get the negative marks removed from your credit report. But you have to take the initiative and make the calls. Another thing to remember is that the older the negative items are the less they count towards your score, so credit problems in the past won’t haunt you forever.
One “trick” to increase your credit score is by increasing your credit limits but keep your balances where they are. This improves your credit utilization ratio, but may have the down side of raising your credit to income ratio and could hinder your chances of getting a new loan.
A Word On Credit Repair
There are many credit repair companies that promise to “fix” your credit for a fee. Be very careful before deciding to pay someone to help repair your credit. Many of these companies are scam artists and only make your situation worse. Here is an excellent article on credit repair companies we highly recommend you read before going down that road. If you are struggling to make ends meet, try contacting your creditors directly and see if you can work out a better repayment plan that you can commit to. Or see a legitimate credit counselor. Your credit score won’t be affected immediately by taking these steps, but if start managing your credit now and make your payments on time, your score should increase over time barring further credit problems. Seeking assistance from a reputable credit counseling service will not hurt your credit score.
Remember These Points
- Don’t close unused credit cards as a short-term strategy to raise your score unless you need to improve your credit to income ratio to secure a new loan.
- Don’t open a credit accounts just to increase your available credit. This approach can easily backfire and may actually lower your credit score. New accounts will lower your average account age – especially if you are just getting started, which will have substantial effect on your score.
- If you are shopping for a car or a home, keep your rate and loan comparisons for a given loan limited to a short period of time (like three months or less). Most credit scoring models understand that you are shopping for a lone and won’t count the multiple inquiries against you.
- Checking your own credit report and score does not count against you! Inquiries to your credit profile for the purpose of making a loan decision are called hard inquiries and are the only type that count against you.
- Closing an account doesn’t remove it from your credit report and can still affect your credit score.
- Paying off – or at least “down” – your revolving accounts such as department store cards is a quick way to affect your score. Paying down your installment loans, such as your mortgage, auto or student loans, will help but typically not as much as reducing your revolving debt.
- Carrying high balances can lower your score – even if you pay your bills in full each month. Most creditors report the balances on your statements to the credit bureaus.
- Keeping your balances to 30% or less will have a positive impact on your credit score.
- You don’t have to carry a balance to have good credit or good credit scores.
There Are No “Quick” Fixes!
The best advice we can give you for establishing or rebuilding your credit is to monitor it regularly and manage it responsibly over time. Recovering from a derogatory mark on your credit report or establishing credit for the first time will take time so be patience and be disciplined about managing your credit and you will gain the improvements you are looking for.
[author image=”http://phroogal.com/blog/wp-content/uploads/2014/08/images.jpg” ]Skip Lahti is a veteran in the credit reporting and financial planning industry. Now, along with a couple of other reputable industry veterans, he has launched a new website for consumer credit reports and scores that are more accessible and friendly to the average consumer.[/author]
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