How Can You Improve Your Credit Score?

Did you know that regular, on-time payments to your credit cards can improve your credit score? Try online credit counseling, receive a free snapshot of your credit report and see if a debt management program is the best solution for you.

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Consumers treat credit scores about the same way they do weight loss. They know their lives would improve if they did something about it today, but they keep putting it off until tomorrow.

STOP waiting!

Credit scores are vital to your financial health. They are used to judge your trustworthiness in repaying a debt. A good credit score – something north of 70 is a good goal – means you will receive good interest rates on any borrowing you do. Push the score above 750 and you likely qualify for the best rates a lender offers.

Low credit scores have the opposite effect. You can’t buy a car, a home or get insurance for either one. In fact, you can be denied housing, utilities and pay outrageously high interest rates on credit cards, if you have a bad credit score.

So, a good score – preferably 700 or higher – matters. Here are some steps you can take today that will get you there.

How to Improve Your Credit Score

The fastest way to improve your credit score is to stop using your credit cards and pay down the balance on each and every one. Nothing beats making on-time payments every

month, except maybe making them twice-a-month. Don’t be afraid to devote some portion of every paycheck to reducing the balance on all debts, especially credit cards.

If you can get the balance on each card down to less than 30% of the available limit (e.g. under $300 on a credit card with a $1,000 credit limit), your credit score will start moving up. If you can get the balance down to zero, your credit score will jump up.

Here are some other steps that have a positive effect on your credit score:

  • Do not apply for another credit card unless you really need one.
  • Do not close the account on cards you no longer use. It will have a negative impact on credit utilization rate and average age of your accounts, two major factors in determining your credit score. Keep them open, but keep paying on them so the balance goes down. The only reason to cancel a card is if there is an annual fee or some other transaction fee that is adding to your debt.
  • Monitor your credit report to make sure there are no inaccuracies that could bring down your score. You can request a free copy of your report at www.annualcreditreport.com. Monitoring your credit report will help alert you to identity theft if you see charges that don’t belong.
  • Dispute debts with creditors, bill collectors and reporting agencies if they are in error.
  • Pay your bills on time. If you’ve missed payments, catch up. If need be, set up automated reminders when payments are due. Or set up automatic payments from your bank account.
  • Don’t just move debt around. Don’t pay off one credit card with another card. Opening multiple accounts in a short period of time is also a negative.
  • If you have overdue bills, bargain with the creditor to see if they will accept partial payments. If they won’t, have the creditor report the account as “paid as agreed.”
  • Get help. If you’d like to take these steps but don’t see how you can swing it, call a non-profit credit counseling agency and ask for help coming up with a viable plan.

Negative Factors in Your Credit Score

If you are in a hurry to improve your credit score, it is wise to understand the negative influences on your credit report and how long those negatives will be there.

Most negative influences on your credit report stay there for seven years, though their impact on your credit score goes down over time. In other words, it counts less in the fifth, sixth and seventh year than it did the first three years.

The most obvious negative influence on a credit score is late payments, especially those that go to a bill collection agency. A lesser known, but equally negative influence is found in debts listed in public records like bankruptcy and tax liens. Chapter 13 bankruptcy is on your report for seven years. A Chapter 7 bankruptcy is there for 10 years.

Tax liens are a slightly different story. They can stay on your credit report for seven years after they have been paid. However, the IRS will allow consumers who pay their tax liens to request they be removed from the credit reports immediately.

Why Your FICO Score Matters

FICO, or Fair Isaac Corporation, is the nation’s oldest and most trusted provider of credit scores. Over 90% of businesses use the FICO score to help determine a consumer’s creditworthiness.

FICO scores are the three digits that tell lenders how likely you are to pay back the loan on time. Unlike your weight or age, the higher the number, the happier you’ll be.

A score of 720-850 is considered excellent; 690-719 is good; 650-689 is average; 600-649 is poor and anything below 600 means you have really bad credit.

You can increase your score using the steps shown above, but they are not necessarily easy. If that prospect bothers you, blame William Fair and Earl Isaac, the founders of the credit scoring system. They were the mathematical engineers who devised the first credit-monitoring system in 1956.

Fair, Isaac and Company was eventually shortened to FICO, and it is the go-to information source for the three major credit-reporting agencies: Equifax, Experian and TransUnion. The three agencies’ evaluation methods differ slightly, but the final numbers consistently reflect your credit-worthiness.

The final numbers are all based on algorithms only pointy-headed professors like Fair and Isaac would truly comprehend, but here’s all you really need to know: Your age, race, religion, sex, marital status, address, income and employment history have no bearing.

Lenders will factor some of those in when deciding whether to give you a loan and other scoring systems may use that info, especially income and employment history, to calculate their scores, but FICO’s algorithms don’t care.

Only credit-related matters are considered. Your credit card history, mortgages and public records like bankruptcies, foreclosures, wage attachments and liens. Their importance diminishes over time, but bankruptcies stay on your score for 7-10 years.

Credit Booster eBook

Credit Booster: Helping You Enhance Your Credit & Manage Your Debt – eBook

This book provides practical tips on how you can improve your credit score and credit report through improving your history of on-time payments, disputing incorrect information, reducing your credit utilization and maintaining a legacy credit card. Put these tips into practice today and watch your credit score improve.

What Makes Up Your Credit Score

FICO bases scores on five categories with varying percentages of importance:

Payment History – 35%

Payment history accounts for thirty-five percent of your score. Whether you’ve paid your credit account on time. Having no late payments doesn’t mean you’ll get a perfect score, however, since 60-65 percent of credit reports show no late payments, that would be considered a very good thing.

Amounts Owed – 30 %

That includes the total figure you owe and what percentage of your credit limit you use. For instance, if you have $7,200 on a Visa card with a $10,000 limit, your “credit utilization” is 72%. Experts suggest you limit credit utilization to under 30 percent, which in this case would be $3,000. Having high balances shows you might be overextended. Some people believe they have to carry a balance to build credit. This is a myth. Paying a debt off early will help your credit score.

Length of Credit History – 15 %

The longer you’ve used credit, the better. Closing long-standing credit accounts can hurt your credit score.

Credit Mix – 10 %

The combination of credit cards, installment loans, mortgages and other credit payments. As long as you make on-time payments, the more types of credit you have, the better.

New Credit – 10 %

Everybody has to start somewhere, but opening several new credit accounts in a short period is a red flag. In other words, don’t apply for more than one or two credit cards at a time and make sure you keep your oldest credit cards open even if you don’t use them often as the average length of time you have had your credit cards matters.

The percentages in each category are not set in stone. For instance, length of credit history will count less for newer consumers than longtime credit users.

If you don’t think your score matters, think again. A good one not only means you’ll get a loan quicker and easier, it often means lower interest rates.

Say you apply for $200,000 fixed-rate, 30-year mortgage. If your credit score is 760 or above, you’d get a 3.48 interest rate (based on January, 2016 rates). If your credit score is 620 to 639, the rate would be 5.07.

In real money that means your monthly payment would be $895 with a good credit score and $1,082 with a bad credit score.

With work, you can improve your credit score and make yourself much more enticing to lenders..

Frequently Asked Questions

What is a credit score?

A credit score is a 3-digit number that gives businesses, especially those extending credit, a summary of your credit history and an idea of how likely you are to repay a loan. The scores range from 300-850. The higher the number, the more likely you are to make a payment. The Fair Isaac Corporation (better known as FICO) created the model for credit scores in 1958. The FICO score is used in 90% of business decisions about credit.

What is a good credit score?

There is no exact answer to that, but generally speaking, the top category starts with scores above 750 and the bottom category is anything below 550. There are usually 3-4 levels in between, but the actual values for each category change, depending on the business using the credit score. The factors that credit card companies are interested in are not the same as what would interest bankers or credit unions, so scores and standards do vary.

What are the quickest ways to improve my credit score?

Make on-time payments every month. There is no faster, more effective method. Next best step is to limit use to only 30% of the credit available. If you have a credit limit of $1,000, don’t use that card for more than $300 per month of expenses. Beyond that, get started young with credit; have a variety of credit – mortgage, auto loan, credit cards, etc. – in the mix and don’t apply for a loan or credit card unless you really need it.

Who determines my credit score and how do they do it?

The Fair Isaac Corporation (best known as FICO) generated the first credit score in 1958 and remains the standard used in 90% of business decisions. A FICO score is a complex computer algorithm that evaluates information from your credit report. The information is weighted according to this model: 35% of your score is determined by payment history; 30% is determined by your use of credit, which means the amount owed; 15% is determined by how long your credit history is; 10% is determined by the mix of credit; and 10% is determined by how many credit inquiries (times you sought credit) you have.

Where does all that information about me come from?

FICO uses information from the credit reports compiled by the three major credit reporting bureaus in the United States: Experian, Equifax and TransUnion. Anytime you use credit, the information is sent to the reporting bureaus. The bureaus also use information from public records (i.e. tax liens, bankruptcies). Most businesses send information to all three credit bureaus, but smaller businesses may only send to one.

Don’t Experian, Equifax and TransUnion have credit scores, too?

Yes. Each bureau has its own score, but FICO’s score is the standard bearer. Each of the bureaus sell their scores to whatever businesses want to evaluate you as a loan prospect. It helps the business gauge the likelihood you will repay the loan being considered.

Why do I have a different score with each credit bureau?

Each credit reporting bureau has its own algorithm and they weigh things differently. For example, a late car payment may be a bigger negative with one than it is with the others or 25 consecutive months of on-time payment may count more with one than it does the others. The credit scores that any business you deal with receive are going to be pretty close, but they are not exactly the same.

Is there a direct line between my credit score and the interest rates I’ll get from lenders?

No, not exactly a direct line, but pretty close. Every business has a variety of elements that they factor into equation before making a final decision. So there is no straight line, but your credit score is a very, very close indicator of whether you qualify and what interest rate you’ll be charged for borrowing money for any purpose.

Do credit agencies decide whether I get a loan?

No. The lender makes the final decision. Your credit score is part of the decision-making process – a vital part – but the ultimate judgment comes from a bank, credit union, card company, auto dealership or whomever it is that is extending you credit. Credit bureaus do not have any say in the final decision. They are paid only to provide a score.

What happens to my credit score if I am late or miss just one payment?

There is a negative impact anytime you miss or are late with a payment and that information remains on your credit report for seven years. On-time payments are the single most important contributor to a good credit score so that should be a top priority for every consumer

Is it true that my credit score suffers if try to shop around for the best rate on a loan?

It’s best to inform credit bureaus that you are shopping for the best home or car loan rate and they will factor that into your score. Otherwise, there could be a negative impact on your credit score. When you apply for several lines of credit at the same time, it appears you’re desperate and lenders will question whether you have enough money to pay all these sources.

Does my income, race or gender have an impact on my credit score?

No. Credit scores do not take into account income, gender, race, geographic location or any other demographic information. They focus on credit history and use of credit.

What happens if I marry someone who has a bad credit score?

Nothing, as long as you keep all your accounts completely separate. However, if you open joint banking or credit card accounts, co-sign a home loan, or make your partner an authorized user on your accounts, your spouse’s credit history now affects your credit score. It is something both sides need to discuss before marriage.

Does renting an apartment or home affect my credit score?

Yes. Rental history is one of the basic components of a credit report. For young consumers, it often is the first sign of responsible payment habits. Paying rent on time is a good way to build up your credit score or help improve one, if you’re trying to repair your score.

I always pay cash and never use credit so I should have a pretty good credit score, right?

Wrong. While it’s a great idea to always pay cash, credit scores are based on the history of your use of credit. Since you have no history of using credit, you will have to build one. The easiest way to start is with a credit card.

Is it true that it’s a good idea to start working on your credit score when you’re young?

Yes. You can do that by making your child an authorized user on your credit card. You don’t have to give the child the card until you feel like they’re ready. In the meantime, use it

responsibly by yourself (i.e. make on-time payments every month!), and your child will get credit for that along with you.

Consolidate Debt With Bad Credit

Yes, you can consolidate your debt payments with bad credit by pursuing a debt consolidation alternative like a nonprofit debt management program.

Learn More

Why You Need Good Credit

Good credit saves you money. Good credit keeps your interest rates low, so you can afford to buy a new car or a well-maintained used car instead of a lemon. Furthermore, that low rate saves you hundreds of dollars in car payments each month.

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How Will A Short-Sale Affect My Credit Score?

After a short sale, what kind of hit can I expect on my credit score, and about what would be the recovery time for my credit score?

Learn More

Sources:

ND. What’s in my FICO Scores. Retrieved from http://www.myfico.com/crediteducation/whatsinyourscore.aspx

Arnold, C. (2014, May 2) 11 Ways to Raise Your Credit Score, Fast. Retrived from http://www.forbes.com/sites/moneybuilder/2014/05/02/11-ways-to-raise-your-credit-score-fast/#41d9aaf71716583a87f61716

O’Connell, B. (2015, Aug. 21). Average U.S. Consumer Credit Score Is 695 – Here Are 5 Ways To Get Yours Above 800. Retrieved from http://money.usnews.com/money/personal-finance/articles/2015/06/23/10-simple-ways-to-raise-your-credit-score