How to Improve Your Credit Score
Unless you’re paying for everything in cash – including a home and car – you need to make sure that you have the best credit you can.
So many American’s have debt and credit card balances they don’t know how to pay off. It’s a vicious cycle where you take out credit because you can’t afford to pay for something, but soon you max out so many cards that eventually, you can’t even make the minimums on your credit accounts.
Determine Your Current Credit Standing
You can’t fix something until you know what needs to be fixing.
Or maybe you’re considering a big-ticket purchase (like a new car or mortgage) and you want to make sure you’re where you need to be. Ignoring the problem just makes it worse.
The first thing you want to do is order your credit reports and scores. This will give you a good idea of what it will take to get you to a place where you’re considered a “good risk” rather than a high risk.
You’re allowed to order a free credit report from all three credit bureaus (TransUnion, Equifax and Experian) once a year.
You can also sign up for on-going access and notifications on a monthly basis which can also help you become aware of any fraud issues.
You can also get your scores, which is a numerical indication of your creditworthiness, from all three credit bureaus. You may even want to run your FICO score as well, which is slightly different and used by some lenders to determine whether or not you’re a good loan candidate.
After you see what you’re up against, it’s time to start making repairs to your credit. There are a few steps you can take – some you may not need – and others you will. Everyone is different.
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How to Improve Your Credit by Correcting Errors on Your Credit Report
Now that you have your credit reports, it’s time to check them out in detail. You want to make sure there are no mistakes. Some of the most common errors you might find include.
- Someone else’s name is on your credit report, being reported slightly different – like a different middle, first or last name. This could be a complete stranger or someone in your family, like the difference between John Doe II and John Doe III.
- Someone else has been using your social security number (fraud) and the one his or her history is on your file. – this happened to me before and it is scary!
- You don’t have an account with a lender being reported on your credit history. This can happen if a clerk entered the number wrong, for example.
- Your ex spouse’s information is being mixed in with yours for a new account they opened in their own name.
- It’s past the date for an old, negative item to be removed from your account, such as a bankruptcy.
- Payment status is incorrect. Perhaps you paid off a debt months ago and it’s still being reported with a balance – you can get them to update that information to reflect its new status.
To correct your credit report errors, contact all three credit bureaus – send in the corrections and give them time to investigate it and make corrections.
It won’t happen overnight, so it’s important that you start cleaning up your credit report as early as possible when you know you’re making plans to buy a big ticket item or apply for any credit lines.
Don’t do this one thing
Before you start calling the credit card companies and closing all of your accounts, understand that it’s not having the cards that ruins your credit – it’s how you use them.
In fact, if you go closing your credit cards, you can actually hurt your credit. That’s because you might be getting rid of cards with history, available credit, and good payment history.
As you pay off those cards, your balance to limit ratio improves, raising your credit score. The more available credit you have, which you should leave unused, the better it looks for you.
Whenever you can, get your creditors to raise your credit limit, too. This raises the amount available to you and looks good to creditors. Sometimes this will happen automatically, and sometimes you have to ask for it.
Some things you’re going to have let drop off of your credit report. For example, if you got behind on payments and some of them were delinquent, it can take seven years to drop off.
If you have any public records like liens or bankruptcies, it will take anywhere from 7-15 years to drop off – most public records for seven years, bankruptcies for 10, and tax liens for 15!
This can feel like a long time for your credit to improve, but as long as you clean up the remainder of your credit, lenders can work with you on the other items. You might not get the best rate, but it won’t be a firm denial in many cases.
When determining how to improve your credit – The very best thing you can do is to pay off your debt and stop using your credit cards. Reducing the amount owed can be done one of two ways. Most lenders will recommend that you pay off the highest interest rate cards first, and just pay the minimum payments on the others.
Consider using a budget planner to help you track your expenses.
But some people need a bit more motivation and enthusiasm when they’re going through this process. That’s why they might want to go a different route – one that has them paying off the card that has the lowest balance first.
When you use the lowest balance first approach, it enables you to put those minimum payments toward the next card in line once the lowest one is paid off in full.
When you have your credit scores in front of you, the report will actually tell you what you’re doing wrong – and what you’re doing right! This can be a big help along the road to your credit recovery.
For example, it might say:
- You’ve made all your payments on time – this is something you’re doing right!
- You aren’t applying for new credit all the time – another benefit.
- You have multiple types of accounts, which enables lenders to see how you manage your debt overall.
- You have a mortgage – and are paying it on time – very responsible of you.
But then it could have some negative items on your report, such as:
- You’ve spent 90% of your available credit, which makes it look like you’re living off your credit cards.
- You’ve spent over half of the credit lenders have given you – you should have some cards paid off in full.
- Your credit limits are too low. When lenders give you a high credit limit, it means you have experience managing larger available lines of credit.
It’s good to periodically run your credit report – or better yet, sign up for the alerts system that tells you whenever any changes have occurred on your report. That way you’re always on the ball about where your credit stands.
Maintaining a Quality Credit History
Pay your bills on time, every time. Creditors might waive a late fee and not report you once if you call and explain a situation, but don’t expect them to do that for you time and time again.
Never let anything go into collections. That’s the worst – when creditors have to chase you down to try to get money from you. Instead, call and negotiate a payoff amount or new payment date.
Pay as much as you can or get a consolidation loan to give yourself one monthly bill rather than multiple missed payments. Do your best to avoid collection agencies.
It’s okay to use credit, but try to pay off your credit cards in full every month. If that’s not possible, make sure you keep your spending in line and don’t go nutty with charging up needless items.
Go easy on the new lines of credit. As your score and report clean up, you’ll start getting plenty of offers in the mail. Don’t open new ones unless it’s truly needed and necessary.
Every time you make an inquiry for a new line of credit, it shows up on your credit score. Having 1-2 inquiries is okay, but more than that and it starts to affect your credit score.
Whenever you do apply for new credit, shop smart. If your score and history is cleaned up and rising every month, there’s no need for you to accept a credit offer with an unusually high interest rate or large annual fee.
Should you use a Credit Counselor or Debt Consolidation?
If you can handle it on your own without a debt counselor or consolidation loan, then it’s better to do it that way.
But some people simply aren’t good at managing money or their credit, so having a professional guide you along the way can be a real blessing that removes the stress of the situation from your life.
A credit counselor is someone who helps you make a budget and debt plan. They’ll educate you about your finances and assist you in knowing what is the best course of action. The National Foundation for Credit Counseling is one option. They help using a low cost scale.
When you find a credit counselor, they’ll want you to bring along any pay stubs you have along with statements, a listing of assets, and a list of your monthly bills including groceries, gas, etc.
If you’re already getting collection agency calls or letters, they’ll need to see those so that they can help you get on the right track as soon as possible, because those are the most urgent ones.
The biggest thing you need to be aware of before dealing with a credit counseling service is that there are a ton of scams out there. You want to be working with a non profit agency – one who won’t cause you more harm than good when it comes to your credit score.
Debt consolidation is when you take all of your debt that’s owed and merge it into one account, typically lowering your monthly payment. I company like LendingTree can help with personal loans.
This doesn’t immediately boost your credit score, though.
In fact, it can hurt it initially. Yes, you’ll lower your monthly payment – so if you can’t make your minimums, this might be an option. But it suddenly puts a hard inquiry on your credit report – plus, you now have a big installment loan on your credit report, too.
Cleaning up your credit when you’re in a rush can be frustrating and disheartening. You sometimes wish you just had a clean slate to do it all over again – better!
But that’s not how it works. The good news is, once you have your money under control, you have the opportunity to enjoy pristine credit for years to come. It’s very freeing once you’re out from under the thumb of the credit and debt monster.
Emergencies and carelessness often cause our credit scores to go downhill. The lowering of our scores makes getting credit and loans a major hassle since those lenders see you as a high risk for repaying the potential debt back to them.
You may be extended the credit or loan, but at higher interest rates. There are ways to gain back the credit scores you deserve. The first thing you must do is to obtain all three of your credit reports as soon as possible.
Don’t try to get by with only one. You must get all three because each one can contain different data. When you get them, look them over completely with a fine-tooth comb.
Note any mistakes and report them to the bureau right away. Even the slightest mistake on your reports can cause you to have a lower score. Make sure all three reports have the same information as the others.
Discrepancies can also hurt your chances of receiving a good score from the credit monitoring agencies. Sometimes the credit card companies don’t report to all three bureaus, so check and be sure all three have the same facts and figures.
Take a look at the debt that is owed to your creditors. Negotiate with the companies over the debt and get the debt paid off if possible. If they report that the debt owed to them has been paid in full, your credit reports will reflect that positive action and your credit score will be raised.
If it’s not possible to pay them all off, then pay as much as you can on a regular basis. Make sure you’re paying all of your bills on time. Late payments, especially recent ones, get on your reports and are factored into your credit scores as a detriment.
Don’t apply for any more debt until you have all of your old debt paid off. The credit reports will reflect all of the debt that you owe, so the more debt that it shows, the lower your score will be until it’s paid off.
It also looks better if you charge very small amounts and then pay it off completely each month on time. It shows your ability to repay your debt. Don’t pay another company to take care of your credit repair unless you absolutely know that they come highly recommended.
It’s best you do it yourself. Most of the companies that claim they can repair your credit instantly are scams that will take your money and do nothing for your credit. Work hard to keep it clean and pay off all your bills on time. You can bring a negative score to a more positive one with a little diligence in budgeting for your bills and maintaining a timely schedule.
Repairing Your Credit in Time for a Home Loan
You’re in the market for a new home and want to apply for a home loan to get the dream house you’ve always wanted. You’re devastated to find out that you were either turned down for your loan or your interest rates for the loan are sky high. What can you do?
The reason for being turned down for your loan or given the high interest rates is all due to your credit score and how the lender interprets the information when it checks to see if you would be able to pay the loan back.
You can raise your score before applying for the loan if you act fast. Don’t wait until the last minute when you’re applying for a loan to try to raise your score. It will take some time to get your credit turned around.
It’s better to work on raising the scores first and then going to apply for a loan. The better your scores are, the more chance you’ll have to get a loan at a better interest rate. Obtain copies of all three of your credit reports.
Look them over to see if there are any incorrect items on them that could hurt your chances for a loan. Dispute anything that shouldn’t be on those reports. If your report shows negative items that are accurate, try to resolve them by paying those debts off – even if it’s a little at a time.
Pay as much as possible on a regular basis to show that you’re trying hard to repay your debt. If the creditors see that you’re trying, they’ll be more willing to report it to the bureaus, which would affect your credit scores in a positive manner.
Another option that some people try is to dispute a negative item that they know to be correct. If the credit reporting agencies can’t verify the information within a certain timeframe, they’re required to delete that item from their reports.
Although this is legal to do, it’s not really recommended. There’s no guarantee that even if the credit reporting company deletes that item, it won’t reappear later on when they’re finally able to verify the information.
Make sure you keep all of your accounts and bills up to date and current. Even late payments show up on those reports and will affect your credit score. The more positive items that are reported, the better it will look to potential lenders.
Unfortunately, some things will be hard to have removed from your reports, but don’t let that stop you from trying hard to get rid of the negative items. Don’t be afraid to ask for a reinvestigation from the credit reporting companies, since it sometimes helps.
If not, you’ll have to drop the case and concentrate on what’s really important – trying to make more positive items appear on your credit rating reports. Once you’ve done what you can with the reports, start checking around for lenders to apply to for a home loan.
How to Avoid Credit Repair Scams
Many people find out too late – at the exact moment when they need to rely on their credit – that their score falls short of what a lender would like to see. When you’re desperate for a quick fix is when scam artists present you with a credit repair claim that looks too good to be true.
One common scam that’s prevalent on the web today are the ones that claim they know people within the bureaus that they can sweet talk into deleting unsatisfactory items from your reports.
They may know people that work within the agencies, but no one is going to risk their job to erase things from your record just because someone asked them to do it for a stranger.
The only time anything can get fixed on a credit report is when something is verified to be incorrect. But those you can take care of yourself. All you have to do is report is and if it’s determined that it truly is an error, it will get fixed.
Companies that state this claim to you are more likely to take your money and run. No company is allowed to take money until they’ve actually done what they’ve promised to do.
Another common scam is when a company tells you that they know how to convince the bureaus that you don’t really owe a particular debt. The truth is, if you really owe the debt, then there’s nothing that can be done.
The company that tells you this will either take the money and run or will make a weak attempt at a resolution and then charge you anyway. No debt can be erased from a record unless it’s proven to be false or it’s too old for it to be still listed on the reports.
Another common scam to look out for is companies that say they can change the whole credit file into one good clean one. Sorry, it won’t really happen. Your debts will remain on there and any activity you do will be reported on it.
There’s no true way to get a clean record without paying off your debts and paying bills on time. There are some companies that are even offering loans with their credit repair services.
Don’t fall for that. A legitimate company will repair what truly needs to be repaired and that’s it. If you need a loan, that should be done by you. Look out for the 900 number scams.
If a company tells you to call a 900 number to find more information on their services, then look elsewhere. The 900 numbers will charge you per minute for the phone call.
There are companies out there that will fix incorrect items on your credit reports, but it’s best to try to fix those on your own. All you have to do is report the error via letter or email and the agency will investigate and correct your report for you.