How to improve your credit score.

If you do not have a recent copy of your credit report, you are able to get a free copy annually at www.annualcreditreport.com.  Regardless of whether you have good credit or poor credit, it is a good thing to know what is on your credit report. It can not be stated enough that the better the credit score, the lower the interest rate you will get on any type of loan.  A credit score indicates only your ability to pay, it has nothing to do with demographic information, such as, income, employment, ethnicity, religion, etc.  It just tells someone how well you pay your bills.  The credit score model ranges from 300 to 850 and was developed by Fair Isaac and Company (FICO) after World War II.  It is a complicated mathematical formula that determines your ability to pay.

Credit scores are to getting a loan as SAT’s are to getting into college.  Everyone tells you that they do not mean much, but in fact, SAT’s play a very important part in getting into college just as credit scores play a very important part in loan interest rates.  See our article on what is needed to know before you are quoted an interest rate listed under ‘interest rates.’

Being that credit scoring is a mathematical formula, there are some things that you can do to improve your credit score.  They sound easy enough, but it will take time. 

1)      Make more than the minimum amount payment on your credit cards.

a.       Paying off credit cards is a very effective way of improving your credit score.  Also, paying down your auto, student and mortgage loans will help, but not as much as paying off credit cards.

b.      It does not matter if you pay off a high or low interest rate credit card.  Remember, the key is to pay down your credit cards.  You can easily calculate the Debt To Card Limit (DTCL) for each credit card you have (amount owed / available credit).  Try to keep the DTCL to around 30% on each card.

2)      Use cards wisely.

a.       Think before you use your credit card.  You may think you need to purchase that special item on sale, but after you add the finance charges from your credit card, you may discover that the actual cost of the item (sale price plus interest charges) was more than the regular price.

b.      Remember the important thing is your monthly DTCL on each credit card.  Paying off your credit card is prudent, but if you can not pay off the entire amount try to keep the DTCL at about 30%.

3)      Check your credit limits.

a.       Check to make sure that your credit limits are correct on your statement.  If you have not been late on any payments, even if you have an outstanding balance, ask the credit card company to increase your credit limit.  Remember that any increase in your credit limit will cause your DTCL to decrease and that is good for your credit score.

b.      Usually American Express does not give you a credit limit and your current monthly statement is your current limit.  Not having a credit limit may seem like a good thing, but remember that your DTCL will always be 100% every month and it looks like you are always maxed out your credit limit.  There are other credit card companies that offer the same type of card.  Your score may be lower than it actually should be due to this practice.  If requested, some credit card companies will give you a credit limit of whatever the highest balance has been on the card which will help reduce the DTCL on that card.

4)      Use a card that you have not used in a while.

a.       The longer you have credit established with a credit card company the better.  Accounts that have not been used in a few months are not given as much weight in the credit scoring formula as your active accounts; therefore, it is in your best interest to keep your credit card active by using it occasionally to keep the account active.  This will have a positive influence on your credit score.

5)      Communication is beneficial.

a.       As soon as you get into financial trouble, call your credit card, loan or mortgage company.  Like you were always told, “I do not know what you are thinking.” You must communicate with all creditors when you can not make a payment.  By communicating with your creditor, you may be able to prevent a late payment from showing up on your credit report.  They may also make special arrangements to make your payments more affordable to you.  Calling after you have been turned over to a collection agency is not in your best interest.  Not only does it affect your credit, but it can add additional stress than you really do not need.

6)      Dispute derogatory reports.

a.       There may be the possibility that the collection agency may not have the information needed to verify the dispute that is posted on your credit report.  Also, you may be able to negotiate the amount owed for a lesser amount and if an acceptable payment is agreed upon, request that the collection agency remove the information from the credit bureaus reports.

b.      Your credit score is based on the information in your credit report, so certain errors can really affect your score.  Report immediately any erroneous late payments, charge-offs, or collections.  Check that your credit limits are correct; this affects your DTCL and will reflect in your score.  If you had a bankruptcy, make sure that everything included in the bankruptcy is not listed as being unpaid.  And, remember that negative items older than 7 years should automatically drop off your credit report except for a bankruptcy which is listed for 10 years.

c.       Because the credit score is affected by recent activity, including having derogatory information removed, after paying off and having derogatory accounts removed from the credit report, your credit score may go down instead of up.  This is only a temporary situation and the credit score will improve.

7)      Never ask to have your credit limit lowered. 

a.       Lowering your credit limit will increase the DTCL and will have a negative effect on your credit score.  It is better to ask for an increase in a credit limit so that you have a lower DTCL.

8)      Late Payments.

a.       Never skip a late payment.  It is better for you to always be 30 days late than it is to have the late become 60 days late or longer.  For the mortgage industry, being 30 days late every month is considered to be only one mortgage payment late.  As the number of late payments increase, the lower your credit score will be and the higher the interest rate will be on your next loan.  Being 60 or 90 days late is going to result in a higher interest rate when you either refinance or take out another loan.

b.      The difference in being late affects those with good credit more than those with poor credit.  If you have many derogatory things on your credit report, one more will not really matter, but if you have an excellent credit report, the derogatory mark on your credit report will substantially affect the credit score.

c.       Write a letter of explanation (LOE) to the lender and credit bureaus so that there is a record of why you missed a payment.  The (LOE) may include anything from losing your job, having an accident, personal family responsibilities, or temporary illness.

9)      Consolidating Accounts  

a.       Solicitations from credit card companies to consolidate your credit card balances at a low introductory rate sound very inviting, but can be counterproductive due to the DTCL that you have with that card.  If you do have poor credit and are disciplined enough to make large payments on the new credit card to reduce the balance in a very timely manner, it will have a positive effect on your credit report.

b.      It is important to remember that we all are creatures of habit and often end up paying the minimum amount due on the bills and when we consolidate debt, whether it be on another credit card or through a refinance to lower your total monthly payment, most of us end up in the same trap and continue to spend because we now have no balances on some of our credit cards.

10)  Remember   

a.       Closing accounts, even when you do not use them, may lower your credit.  Even though you close an account, any derogatory information from that account will remain on your credit report.

b.      Debt consolidation will affect your credit.

c.       Paying down your credit card debt to around 30% DTCL will increase your credit score.

d.      Even if a credit card, loan or mortgage company reports something to the credit bureaus in error, it will affect your credit score.  It is your responsibility to have errors others have made to your credit report corrected.

e.       When any company that tells you that they made an error and will have it corrected, request that they send you a letter stating that it was their error and that they will have it removed from your credit report.

f.       With personal security issues that are in place, do not expect someone other than the person in question to have erroneous information removed from your credit report.