Tips for Improving Your Credit Score

 

Short-Term Improvements

The first step to improving your credit score is to know what is on the credit histories maintained by the major credit bureaus and to make sure the information is accurate. Even the best handling of credit can be ruined by mistakes or false information because your credit score is calculated based on the data in your credit history. You have to pay to see your credit score but not the credit history. Once each year you can get a free copy from each of the credit bureaus from the FTC-authorized provider, Annual Credit Reports (see References). If you find incorrect information on your credit history, you can initiate a dispute or corrective action online at the website of the appropriate credit bureau (Experian.com, Equifax.com or TransUnion.com).

There are a couple of other things you can do in the near term to improve your credit score. One is to refrain from applying for new credit accounts or closing accounts. Doing this occasionally (once or twice a year) doesn't lower a credit score. Frequent changes of this type do because they are seen as a sign of poor money management. The second thing is to eliminate excess available credit. For example, if you have a credit card with a balance of $500 and a credit line of $5,000, ask the lender to lower your credit limit to $1,500. Having less available credit that you can access easily makes you a better risk and so improves your credit rating.

Managing Credit

Long-term management of credit is the real key to improving your credit score. By far, the most important step is to make sure you are current on all your monthly bills and continue to pay them on time. In the FICO credit scoring system used by all three credit bureaus, this accounts for fully 35 percent of the total score. The other major priority is to reduce your total debt if it is excessive, especially unsecured debt such as credit card balances and personal loans (your total debt counts for another 30 percent of the FICO score).

If you are having trouble making payments, consider a debt consolidation loan. This can not only help you stay current on your bills, but it can make it easier to reduce your total outstanding debt. It will take up to two years to see a significant improvement in your credit score because the length of time you make timely payments is a major factor. Effectively and consistently managing the use of credit over time is absolutely essential to having a good credit score. Good credit behavior over time makes you a better risk than anything else you can do.

There are some items that will seriously hurt a credit score and by law must stay on your record for years, so avoiding them is crucial. These include tax liens or judgments against you for unpaid debt, foreclosure and defaults on debt. Bankruptcy has a similar damaging effect but is treated somewhat differently.

Credit Repair

If your credit score is already low or you have declared bankruptcy, you will need a strategy of credit repair in addition to taking the steps discussed above. First, keep in mind that a credit bureau must have data to calculate a credit score. If you don't still have an active credit account (preferably two or three), you can start the repair process by obtaining a secured credit card. These cards require that you deposit funds with the card issuer to secure the money you borrow. As you make timely payments, the credit limit will be increased. More important, you will be establishing a record of responsible use of credit.

If you have a bankruptcy on your record, don't be discouraged. Within the FICO scoring system, bankruptcies are placed into a separate category. The bankruptcy will be there for years and initially will result in a very low credit score. However, over time your score is primarily calculated based on your use of credit after the bankruptcy. What this means is that you can start over. Good credit management can improve your credit score to reasonably good condition within a couple of years

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