With so many books, seminars, websites and companies are dedicated to the subject, you would think that improving your credit score is a difficult and complex process only trained professionals are capable of attempting. This is simply not true.
Sure, credit repair companies can help, particularly if there are errors on your credit report or you have been the victim of identity theft; but the general principles are straightforward and most people can get through the process just fine by themselves.
By following the five simple steps outlined below, you will be well on your way toward improving your overall credit standing.
1) Review your credit report for errors or inaccurate items and check your credit score.
You can check your credit report for free at annualcreditreport.com once a year. You’re entitled to do it more than once a year if you’re unemployed and looking for a job, if your report previously had incorrect items on it, or if you've been the victim of fraud. However, the free report will not include your credit score.
You can request your credit score at any time (for a small fee) from one of the three major credit reporting agencies: Equifax, Experian or TransUnion.
Pro Tip: Check your credit report and score periodically. This will help you see whether your credit improvement plan is working and will provide damage control if you happen to become the victim of identity theft. Some credit card providers, such as Discover and Barclaycard, provide members with free access to their credit score.
2) Dispute any errors on your credit report.
The Fair Credit Reporting Act puts the responsibility of keeping accurate credit records on the credit reporting agencies and the companies or individuals that provide them with information. If there is information that is incorrect or inaccurate, write to both the agency and the person or organization that provided it, and request that the item is either removed or corrected. They will then have to either correct the error or provide evidence to its accuracy.
Pro Tip: Make sure you enclose a copy of the credit report with the relevant items highlighted and send your letter by certified mail, so you can later document what the agency received. It will then be their responsibility to either correct or substantiate the offending items. The Federal Trade Commission has a free sample letter for disputing errors on your credit report that will do the job.
3) Pay your bills on time.
Your payment history represents 35% of your FICO credit score. It is the single most important factor in the complex calculation. Once you've fixed any errors on your credit report, you need to focus on building a flawless credit history that portrays you as a safe bet to lenders. Delinquent payments, even if they’re only a few days late, can do a lot of damage to your credit score. The good news is that credit score algorithms give more weight to your recent credit history. Old credit problems and mistakes don’t affect your credit that much, and their impact will continue to fade as time passes.
Pro Tip: Set up payment reminders or even enroll in automatic payments with your bank, so you never miss a bill again. Remember that once a collection account is posted on your credit report, it will remain there for seven years, regardless of whether you pay it off or not.
4) Keep your credit card balances low.
How much you owe in relation to how much credit you have available makes up a total of 30 percent of your FICO credit score. I know this is often easier said than done, but avoid spending more than you can pay off every month. If possible, use your savings to reduce the amount you owe on your credit cards or other sources of revolving credit. Maxing out your credit cards or having a high outstanding debt can hurt your credit score.
Pro Tip: Pay off your credit cards several times a month, especially after a big purchase. Your credit score is based on the total balance on your last statement, regardless of whether you paid it in full. It’s a particularly good idea to do this before applying for a loan.
5) Don’t close unused credit cards or open a bunch of new accounts at once.
The length of your credit history and excessive new credit requests account for 25 percent of your FICO credit score. When you close old accounts or open a lot of new ones, you lower your average account age and your score will take a hit.
Pro Tip: Sometimes credit reporting agencies may drop old unused accounts. Keep them alive by using them from time to time. For instance, you could charge your gym, telephone and internet bill to your three oldest accounts.
That’s it. Credit score algorithms may be complex, but improving your credit score is really quite simple.
That doesn’t mean improving your credit score is easy. It’s not. Think about improving your credit score as you would about losing weight. The principles are simple. Just eat plenty of fruits and vegetables, burn more calories than you consume and exercise regularly. Easy, right? Hardly.
Putting those simple principles in practice is where the challenge lies, because in both cases it often requires changing strongly entrenched habits, enlisting a ton of self-control, and having patience with the process.