Improving Your Credit Score
In a previous post, I talked about the importance of your credit score and credit history. Today I want to talk about how to determine your current score and history, and ways you can then improve it.
First, you want to determine where you currently stand. The first step is simply pulling your credit report. You can do this at www.annualcreditreport.com, which is run by the government and is the only place where you can truly pull your report for free. You can do this once per year for each of the three credit reporting companies. Pull your report and make sure you understand the information it contains. Verify it for accuracy and make note of any information you feel is incorrect.
It’s also important to know your FICO score. There are two ways you can do this. One is to use the site www.creditkarma.com. You won’t get your exact score here, but it’s free and it will give you a good estimate. In my opinion, just knowing the ballpark of your score is good enough right now, but if you want to get it exact you’ll need to go to www.myfico.com and pay $20 for your true score. Make sure you do the FICO Standard option and pay the $20. If you go the free route, they’ll enroll you in a service that will start charging you $15 per month if you don’t remember to cancel. Also, you really only need to pull your score from one bureau. It costs more to pull from multiple.
Ok, now that you have your report and your score, you’re ready to start taking some steps to improve them.
Building Credit from Nothing
First off, if you have no credit, it’s time to start building some. The easiest way to do this is by starting with a secured credit card. A secured credit card works like this: you give a small amount of money to the issue, say $500, and they keep it in an account. Then they issue you a card with a credit limit of the amount you paid. You still pay off your balance each month, but the issuer is protected in the case that you don’t because they have your deposit. That protection allows you to get the card, even without a prior credit history.
You can compare different secured credit cards at www.bankrate.com, or you can stop by a local bank or credit union branch. Other than the bankrate website above, don’t do your shopping online. Most online offers are bad deals.
Before you commit to a card, you want to make sure of a couple of things. First, you want to make sure that the annual fees are low. Some cards will charge very high fees, and this is definitely not worth it. Use the bankrate site to get an idea of reasonable fees. Second, verify that the card issuer will be reporting your information to the credit bureaus. This is the whole point of getting the card, so this is a must.
Once you’ve had your secured card for 6-12 months, assuming you’ve made your payments on time, you should be able to get a regular credit card. When you make this step, there are two big concerns. The first is making sure that there are NO regular fees associated with the card. Unlike with a secured card, there is no reason you should be paying any annual fee. Second, make sure you only use your card for regular purchases and that you pay your balance in full every month. Building your credit is of no use to you if you’re putting yourself in debt at the same time.
Once you’ve upgraded to a regular credit card, you can cancel your secured card and avoid that annual fee. Assuming you have no balance on the card, they will return your entire deposit to you at this point.
Improving Your Existing Credit History
So what if you already have credit accounts? There are a number of things you can start doing right away to improve your score. I’ll try to list them in what I consider to be priority order.
Pay On Time
The first and most important thing you have to do is pay all of your bills on time. Even if it’s just the monthly minimum. 35% of your score is based on your payment history, making it the single most important factor. Whatever you’ve done in the past, make sure you’re paying everything on time going forward. I would recommend setting up automatic payments through your bank if you can, just to make absolute sure.
Manage Your Credit Utilization Ratio
The second thing you can do is start paying down any credit card debt. A big part of your credit score is what’s called your credit utilization ratio, which is the percent of your total credit that you’re actually using. So for example, if between all of your credit cards you have $10,000 of credit available and your total balance across all cards is $5,000, then your credit utilization ratio is 50%. As a general rule of thumb, you want this ratio to be below 30%. This shows anyone looking at your report that you’re using your credit responsibly. If you’re rate is too high, it makes you a higher risk because it you’ll have a harder time making all your payments.
If you’re paying all of your credit cards in full every month, you may still have a high credit utilization. Your current balance is counted, even if it’s not overdue, so you can have a high utilization if you put a lot on your cards relative to your credit limit. Two potential solutions here are using your credit card less, or simply asking your credit card company for a higher limit. If you get the higher limit, make sure this doesn’t lead to more spending. It’s simply a tool to help improve your credit score.
If you are actually in credit card debt, meaning you’re not paying your balance in full every month, you need to start getting more aggressive in paying this off. This will not only help your score, but will help you save money immediately as you’ll be paying less in interest. I would recommend finding out the interest rate being charged on each card, and then listing them in descending order from highest rate to lowest. Direct any extra payments you can make to the card with the highest rate, until it’s completely paid off. Then move those payments to the next highest rate, and so on. The ultimate goal would be to pay off all your balances in full, but an initial goal would just be to get your total utilization under 30%.
Pay Down Other Debts
Once the utilization ratio on your credit cards is down, you’ll want to be more aggressive paying down other debts, such as a mortgage or student or auto loans. Paying these debts down shows in another way that you are responsible about paying back your debts in a timely manner. As your balances get lower relative to the original loan amounts, your score will improve.
Handle the Negative Information
Finally, you want to make sure any bad information is taken care of to the extent possible. The first step here would be disputing any inaccurate information. If there is any information on your report that is not correct, you can dispute that information with the credit bureau reporting it. You can do this directly through the www.annualcreditreport.com site you used to pull your report.
For some of negative information that may appear on your report, such as bankruptcies, foreclosures, and accounts closed with an outstanding balance, there’s really not much you can do as long as the information is accurate. You’ll just have to wait for that information to become irrelevant and eventually be removed. That will simply take time. But you may have things like outstanding bills in collections that can be handled. Get the contact information for the collection agency and contact them to try and negotiate a settlement. They will often be willing to settle for a fraction of the outstanding balance, so don’t hesitate to try. Make sure you get any offer in writing so you have documentation in hand in case a dispute arises. And know that paying off the collection will not remove it from your report. It will stay there for seven years. But it will indicate a responsibility for handling your debts, and that will certainly look better than leaving it open.
Keep the Good Habits
Once you’ve gone through all these steps and seen your score improve, it will be tempting to let up a little bit and potentially let some bad habits creep back up. Be aware of this and remember all the work you did to improve your credit history. Take those good habits you learned and continue applying them.
