8 Steps to Improve Your Credit Score
July 17, 2014Have you had a rough patch in your financial life? Or maybe you’re trying to position yourself to get the lowest possible rate on a mortgage or even a new job. For whatever reason, you may be like one of the many people I speak to on our Financial Helpline and Ask a Planner sessions who are trying to improve their credit. If so, here are some steps you can take:
1) Make sure your credit report doesn’t have any errors. Even worse than being penalized for your own mistakes is being penalized for someone else’s. It’s been estimated that 70% of credit reports have errors that could be hurting people’s credit scores. If you haven’t done so in the last 12 months, you can order a copy of each of your 3 credit reports from annualcreditreport.com and dispute any mistakes you find. If the creditor doesn’t verify the incident in enough time, it’s removed from your credit report. This is one of the fastest ways to improve your score. Some “credit repair” companies even charge you for them to dispute every negative item on your credit report since accurate negative items can be removed this way as well.
2) Reduce your credit utilization. The more of your credit limit you use, the more it hurts your score. This is especially true if you use more than 30% of your available credit. You can reduce that by paying down your debt but just be careful about closing any credit cards because that will reduce your total credit limit and hence increase your credit utilization. Instead, you can simply put away or even destroy the card itself to prevent yourself from running up debt in the future. If the card charges an annual fee, see if you can convert into a no-fee card or merge the credit limit into another card with the same bank.
3) Don’t have too much credit available either. It’s all about balance. Having too much available credit scares creditors because you have the potential of getting over your head in debt even if you never have. You can use a free site like Credit Karma that tells you whether you have too much available credit and what would happen if you closed one or more cards.
4) Be careful of closing old credit cards though. That’s because closing them can shorten your credit history, which is one of the biggest factors in determining your credit score. If you have to close a card, close a newer one.
5) Be careful of old debts too. Old debts will eventually fall off your credit report after about 7 years but making a partial payment can restart that clock. Older debts also don’t hurt your credit score as much as newer ones.
6) Make timely payments. This will be the most important step in the long run since it has the biggest impact on your score. To avoid missing payments, consider putting all of your debts on auto-pay. Just make sure you have enough money in your bank account or you’ll have an overdraft and hurt your ChexSystems report, which affects your ability to open a bank account.
7) Limit credit inquiries. Each of them dings your score a few points. The good news is that if you’re shopping for a mortgage, all the mortgage inquiries within a couple of weeks will count as one so you can use that time period to rate shop without hurting your credit score too much.
8) Protect yourself from identity theft. You can do everything right only to have an identity thief wreck your credit rating. Here is some information on identity theft, including how to protect yourself and what to do if you become a victim. You can also use sites like Credit Karma and Credit Sesame for free credit monitoring to alert you when anything happens to your credit. Even stronger, is placing a security freeze, which can prevent an identity thief from opening accounts in your name in the first place.
Having a good credit score doesn’t have to be difficult. Even many people who have been through bankruptcy and foreclosure are able to dramatically improve their credit scores within a few years. Just follow those simple steps and you’ll be on your way to a higher score too.