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.
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 an annual credit report for free at www.annualcreditreport.com. Monitoring your credit report will help alert you to identity theft if you see charges that don’t belong.
- Dispute a debt 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.