Your credit score is determined on a variety of factors. The pie chart below is from Fair Isaac Corp., and it lays out the basic weighting system used to determine the score. So, what, exactly can you do to improve your score? The answer to that isn’t as straightforward as you may think.
First, pay down your credit cards so the balances are equal to or less than 50% of the limit. Any cards with balances above 50% of the limit will negatively affect your score. Depending on your cash flow situation, this may or may not be a quick fix. Second, check your credit report and remove any reported accounts that are inaccurate. According to a study conducted by the US Public Research Group,
Pie chart breakdown of credit score factors “Twenty-five percent (25%) of the credit reports surveyed contained serious errors that could result in the denial of credit, such as false delinquencies or accounts that did not belong to the consumer.” All told, “79% of the credit reports surveyed contained either serious errors or other mistakes of some kind.”
That’s no number to scoff at. You must stay on top of your credit report. There are tons of services out there offering credit monitoring services; I’ve personally used two of them. FreeCreditReport.com is a free service run by Experian (one of the credit bureaus) that will allow you unlimited access to your Experian credit report and send automatic updates to your email when your report changes in any way. MyFico.com is run by Fair Isaac Corp. and offers a 30-day free trial for their credit monitoring services; it’s a little more robust than FreeCreditReport.com.
5 Powerhouse Ways To Improve Your Credit Score
1. Correct Obvious Mistakes:
In addition to what I mentioned above, you may be able to get derogatory accounts with zero balances, if they’ve been inactive for some time, off your credit report just by writing a letter to the credit bureaus disputing the account. You see, when you dispute an account, the credit bureaus have to dig through millions of files in their dry storage in order to find yours. The credit bureaus are private, for-profit companies; when you dispute a zero-balance account, sometimes they’ll just remove the account in dispute just to avoid the hassle; it only works if the account has been inactive for a while and has a zero-balance.
2. Make Payments On Time – Sort Of:
This one’s obvious, right? Sure; one thing most people don’t realize, however, is that late payments don’t show up on your report unless they’re more than 30 days late. You can pay your credit card bill a couple weeks late for the rest of your life and the only repercussion may be late fees.And another thing; In most cases, utilities do not show up on your credit report at all unless they’ve gone to collections. So, you can be 6 months late on your utility bill and, as long as the utility company doesn’t send the account to collections, your credit score won’t be affected. I’m not advocating that you not pay your utility bill, but I am advocating that, if times are tight, and you think you’ll be back on your feet in a couple months, hold off on the utilities and make the mortgage payment. Now, I said most cases because I have seen utility bills on credit reports before, so you’ll not want to take everything I say as some sort of gospel.
3. Reduce Credit Card Balances
Like I mentioned earlier in this article, keep your credit card balances below 50% of the limit. The lower the better, but 50% is the magic number. You may be tempted to consolidate all of your credit cards onto one of those 0% 1-year introductory APR cards to reduce your overall monthly payments and then close your other credit card accounts. This could cause problems. Let’s say you have three cards, all with credit limits of $6,000 and balances of $2,000; no problem, they’re all below 50% of the limits. Now, you get this sweet 0% until March of 2050 (I wish) credit card with a limit of $8,000 and you transfer all the balances over; a total of $6,000. Are you following me? Then you close out those three cards that now have $0 balances. While this may seem like a good idea – you lower your monthly payment and pay less interest – it’s not. You’ve now closed out your only cards with balances below 50% of the limit and the only account left open is quite a bit over 50%. The credit bureaus look at the fact that you’ve just reduced your overall available credit and ding you. The better thing to do would be to get two of those intro APR cards and transfer $3,000 to each one, all the while keeping your old $0-balance accounts open. That way you keep your balances below 50% and you still have a good amount of available credit. Credit bureaus like this and the interest rates you’re able to qualify for will be much better.
4. Keep Loan Shopping Within a 2-Week Period
That’s right, just like we mentioned toward the end of Rate Shopping – The Story of the Too Low FICO, you can shop ’till you drop, as long as it’s within a 2-week time frame. Too much shopping could damage your credit score and your ability to qualify for the best mortgage rates. And remember, if some Loan Officer ever tries to convince you that if anyone else runs your credit your score’s going to go down and he won’t be able to do the loan for you, about face and abandon ship.
5. Stop Buying Things You Can’t Afford!
This one’s easy, I know, but the debt society we live in, with department store clerks ramming credit cards down our throats with the promise of 20% off your purchase, it’s something we all need to be reminded of time to time.