How to Improve Your Credit Score
Personal credit scores and credit ratings should not be taken lightly, it is serious business. Your credit score will determine the services you qualify for and how much will pay for those services. Lenders, landlords, credit reporting agencies and even employers use credit scores to evaluate you as a potential customer or employee. If your number is below 750 you may want to work to improve your credit score. A credit score of 750 or higher may qualify you for lower interest rates on loans, pay lower insurance premiums and maybe have employment opportunities that you otherwise would not qualify for.
Tips or suggestions are always helpful when you are trying to repair or improve your credit score and get a better credit rating. Credit restoration can be an intense process but it does not have to be; follow these 14 tips and your credit improvement process will go a lot smoother.
#1 – Avoid Credit Card Balances
The simple action of paying your credit card balances off or in full every month will help improve your credit score. If you pay your always make your credit card payments you are establishing a payment history. And your payment history makes up the largest percentage of your credit score. You are also showing credit card companies that you have a good track record; they like to see that.
Avoid paying the minimum amount due every month. The reason to get in the habit of paying your credit card balance in full every month is so that creditors grade you as a good risk. When you are a good risk you will enjoy the benefits of lower interest rates on loans, lower down payment requirements, paying lower rates on utilities and online banking advantages. Paying your credit cards in full every month shows creditors that you are financially responsible because you spend within your means and can manage money. It also shows that you can handle debt.
#2 – Keep Credit Card Balances Low
You credit score will improve if you just keep your credit card balances low. Your credit card balance compared to the amount of credit available to you is called your credit utilization ratio. If your total outstanding debt is $3000 and you have $30,000 of credit available to you; you have a credit utilization rate of 10%. The financial industry considers 10% a good benchmark for a credit utilization ratio.
A low ratio is good because it raises your credit scores. A low ratio shows that you use a smaller amount of credit than is made available to you; which shows that you are financially responsible. The benefit is that when you apply for credit or loans, you will not be turned down and you will get the better rates. One good way to keep this credit utilization ratio low is by keeping your credit card balances low.
#3 – Limit The Use Of Credit Cards
Limit how often you use your credit cards to help improve your credit score. Use your credit cards in emergency situations only. Limited use of your credit cards will help to keep your credit utilization ratio low.
If you are trying to restore your credit, the over use of credit cards is bad business because you just dig yourself deeper into debt. To improve credit you need to work on getting out of debt not increasing your debt. Creditors use your utilization ratio to evaluate you as a customer. If you abuse your credit cards, your debt is high therefore your ratio is also.
#4 – Limit The Number Of Credit Cards
If you want to help improve your credit score you need to limit the number of active credit cards you have. Your credit score drops when you have too many outstanding credit cards. You are considered a high risk when you have too many credit cards.
When you have too many credit cards your credit score drops because creditors think you are more likely to pay late or not at all. If creditors predict that you are more likely to stiff them vs pay them, you are branded as a high risk. Once you get the black mark of high risk you will pay higher interest rates on loans; you may be forced to have a co-signer on your loans and even have to make larger down payments. Having too many credit cards is bad news.
To save money and also work on building up your credit score, try very hard to avoid spending up to your maximum credit card limits. The amount of credit available to you compared to the amount of credit you actually use makes up the second largest portion of your credit score. The interest rate a credit card company is allowed to charge you for maxing out your limits can be as high as 30%.
When a credit card is issued it comes with credit limits. Your credit scores drop when you use the entire credit limit of your credit card because creditors predict that you will be a risky customer. So if you are working on building a good credit rating, maxing out your credit limit works against you. Keep your credit card balance below 10% of your credit card limit, this is the industry bench mark.
#6 – Pay Credit Cards On Time
One of the best ways to rebuild damaged credit is to pay your credit card bills on time each and every month. Credit scores range from 300 to 850. Avery poor credit score is a score of 300. A good credit score would be around 750 and 850 is a perfect credit score. Late payments can lower your credit scores by as much as 100 points.
Your payment history makes up the largest percentage of your credit scores. When you consistently make your payments late, you lower your score. Just one 30 or 60 day late pay only damages your credit temporarily. But if you become a repeat offender and continually make your payments over 30-60 days late, you permanently damage your credit. Just one late payment over 90 days late damages your credit score for 7 years. The black mark on your credit from one payment made over 180 days late stays on your credit report for 7 years because creditors charge it off and send it to a collection agency.
In addition to lowering your credit score from repeatedly making late payments, you will be: charged late fees ranging from $35 – $40 each month you are late; your minimum payment may be increased or even doubled; and you could be charged the default interest rates ranging from 30% – 35%.
#7 – Get A Free Credit Report Once A Year
You should order your credit reports at least once a year to keep an eye on your credit ratings. Under federal law you have the right to a free copy of your credit report once a year. You can get your free copy by going to the websites of the 3 national credit reporting agencies.
Reviewing your credit reports on an annual basis helps you stay in tune with your personal credit accounts, your credit ratings and credit scores. You want to stay current so that you can catch any mistakes within a 12 month time period vs a 24 month or 36 month time frame. The longer you take to correct an error, the more damaging it will be to your credit rating over the long-term.
#8 – Check For Errors
Yes, credit reports can have errors and it is up to you to correct hose. Errors can damage your credit scores by 100-200 points so you need to fix the mistakes as quickly as you can. If you find errors in the data, notify the 3 national credit reporting agencies in writing with copies of statements, cancelled checks plus any other information that supports your dispute. Go to the credit bureaus’ websites for additional detailed information on the process for starting a dispute. The credit reporting agencies have 30 days to investigate.
Almost one-third of credit reports have serious errors. The credit reporting agencies do not verify the information they receive, they simply report it. Information can get reported inaccurately; maybe an account got marked delinquent when it was not or there is a misstatement on the size of a credit line or outdated information is being reported. Regardless of the type of error, it is your responsibility to dispute and correct any errors you may find on your credit reports.
#9 – Get Current With Your Past Dues
The most efficient way to improve your credit score is to improve your payment history. Getting out of debt helps to rebuild your credit scores and credit ratings. You want your accounts to say “current” or “paid”. You do not want the accounts to say “late” or “delinquent”.
Since payment history makes up the largest portion of your credit scores, decreasing your outstanding debt helps you to improve your credit ratings. If your report reads “current” or “paid” your credit score will not be damaged; but if it reads “late” or “delinquent” your credit score will drop. If a creditor has to write off your unpaid balance, your credit rating takes a big drop. Paying 90 days late is considered a major delinquency and will damage your credit for 7 years. Consistently paying 30 or 60 days late permanently damages your credit score.
#10 – Avoid Closing Out
Try to avoid closing out unused credit cards. Closing out credit cards can raise your credit utilization ratio. Closing credit card accounts does not raise your credit score. Outstanding balances do not disappear when you close a credit card. A delinquent mark on your credit card does not get erased if you close a credit card account.
Part of your credit score is based on your credit utilization ratio and for that ratio to work to your advantage, you need high credit limits to off set your credit card balances. If you close credit cards, the limits from those closed cards are not included in the equation used to calculate your utilization ratio so you have less of an off set. Credit limits help to lower your utilization ratio. Closing credit cards that you no longer use will drop your credit scores.
The first step to repair any damaged credit is to know your credit card limits and stay below those limits. Exceeding your credit limits will lower your credit score. Exceeding your credit limits can also get very expensive. When you spend above your credit limits you can be charged interest rates as high as 30%. When you spend over your credit limits a credit card company can charge you a fee for each billing cycle that you have a balance that is over your limit. These fees can range anywhere from $40 – $50.
When you exceed your credit card limits you send a signal to creditors that you have taken on too much debt, probably more than you can handle. When you spend up to the credit card limit finance charges could push your account balance over the credit card limit pushing you into exceeding your credit limits. This then allows the credit card company the opportunity to not only charge you higher interest rates but also a fee for each billing cycle that your balance is over the card limit.
#12 – Report Missing Credit Cards Fast
You need to report any missing credit cards as fast as you can. If your credit card is lost or stolen reporting it immediately is critical. Report lost or stolen credit cards to the 3 national credit bureaus. Have a fraud alert placed on your credit cards. Call the credit card company of the missing credit card to cancel the card; and verify with them that you are not responsible for any fraudulent charges that may occur.
Credit card fraud can be extremely damaging when you are rebuilding or repairing your credit. Your credit report does not distinguish between charges made on your credit cards by yourself or by an imposter. Activity on your credit cards gets reported to the credit bureaus regardless of whether it is accurate or not. And your credit report is just a collection of data. The credit bureaus do not review or analyze information, they just report information. So the sooner you report a missing credit card, the quicker a fraud alert can be placed on your card and less bad information will be reported to the credit bureaus.
#13 – Pay All Bills On Time
Your payment timing has a big impact on your credit history. When your credit score is calculated all of your payments are analyzed, not just your credit card payments. Your auto loans, mortgage or rent payment, student loans, utilities and cell phone bills are taken into account.
The credit reporting agencies compile your payment history, assign it a numerical value (credit score), summarize it (credit report) and then lenders, landlords and employers use it to evaluate your financial discipline. The payment history in that credit report reflects your payment history for all of your credit accounts, your auto loans, mortgage, student loans and credit cards. One of the best ways to maintain, develop or rebuild good credit is to have the discipline to make all payments on time.
#14 – Mistakes Can Last For Years
Some mistakes can damage your credit for years.
- Charge-offs stay on your credit report for 7 years.
- Collections damage your credit report for 7 years.
- Bankruptcies stay on your credit report for 10 – 15 years.
- Foreclosures stay on for 7 years.
- Tax liens stay on for 10 – 15 years.
- Lawsuits stay on for 7 years from the date of filing.
Repairing, building and improving your credit score is hard enough, why add 7 – 15 additional years of stress and grief. Charge-offs, collections, bankruptcies, foreclosures, tax liens and lawsuits have such a negative impact on your credit. With those mistakes on your credit report you may have a difficult time renting an apartment or buying a house, taking out an auto or student loan and may be even your ability to get a job could be impaired. Stay clear of those mistakes, they will change your life forever.