Our financial lives are filled with numbers, but perhaps none is more important in determining your financial reputation than your credit score. This three-digit figure gives creditors a universal way to assess your creditworthiness, and if your score isn’t as high as you want it to be, you might find yourself being turned away for everything from lower interest rates to opportunities for loan approval or even apartment leases.
Unfortunately, there’s no quick fix for this particular financial stumbling block; negative activity can stay on your record for several years. While there’s no hiding from your past blunders, there are steps you can take to balance out the positive with the negative over time and improve your overall financial standing.
Identify the Problem
Credit scores are calculated using various factors of our financial lives, and many people are unaware of how their actions affect their score. By understanding the area or areas of your credit behavior that are hurting you, you can more easily shift those behaviors to avoid having the same problems in the future. FICO, the standard credit score in the United States, groups credit data into five categories to determine your score:
- Payment history – Do you have a habit of paying your credit accounts late?
- Amounts owed – Have you used a high percentage of your available credit?
- Length of credit history – Are you a new borrower?
- New credit – Have you opened several credit accounts in a short period of time?
- Types of credit used – Do you have experience with both revolving and installment credit, or just one type?
Looking through your credit report can help you identify where your credit weaknesses might be. You’re entitled to a copy of your credit report from each of the three major credit reporting agencies (Experian, Equifax and TransUnion) once per year, free of charge. You can request your annual free report at www.annualcreditreport.com.
Damage Control
The first step to raising your credit score is to repair any existing negative information on your report.
Bring all of your accounts current.
Making your accounts “current” means that you pay any past due balance so that the only debt you’re responsible for is your upcoming payment. While the late payments will still show up on your record, bringing your accounts current allows these accounts to start adding positive data to your report once again, provided you pay on time moving forward.
Start paying down debt by targeting credit card debt first.
Credit card debt likely has the highest interest rates and lowest balance of your outstanding debts, so it’s both easier to eliminate and helps keep you from incurring more debt through high interest rates. Debt can seem overwhelming at first, but it’s important to start paying it down or it will only continue to grow. Try setting a monthly goal that you can pay down each month, even if it’s small to start out with.
Talk to your creditors.
If you miss a payment, you have up to 30 days from the due date before the lender can report the late payment to a credit bureau. While you still might be charged with a late fee, reaching out to your creditors to explain the situation can help you keep the late payment off your credit report. If this is only your first or second time missing a payment, lenders may even be willing to consider a “goodwill deletion,” which could remove the late or missed payment completely if you have an otherwise clean history.
Check the accuracy of your reports.
While some of the negative information on your report may be from debts you owe or payments you’ve missed, you should also regularly check your report to make sure there isn’t any faulty information. If there’s an outstanding payment that you know you’ve paid or negative items older than seven to 10 years (after which delinquencies and even bankruptcies should be taken off your report), it’s worth a call to your creditor to get them removed and your score improved.
It’s also important to make sure your cards show the correct limits; lenders may show or report limits lower than the ones you actually have, which can make it seem as though you’re using more of your credit available than you actually are. This credit use to credit available ratio is called your credit utilization ratio, and it’s a number many credit bureaus use to evaluate you, so it’s important to make sure it’s as accurate and as low as possible.
Raising Your Score
After cleaning up your past, it’s important to start working on adding new, positive data to your report as soon as possible, to help alleviate the damage from any prior negative activity.
Subscribe to credit best practices.
Following credit best practices such as keeping your accounts current, keeping your balances low, protecting yourself from credit fraud, trying to pay more than the minimum balance when possible and keeping your balance under your credit limit are essential to raising your score. Consistently doing these things is the only way to truly prove to creditors that you’ve developed responsible habits.
Build up an emergency fund.
If you don’t already have one, building up an emergency fund can help you from defaulting on credit accounts by giving you a safety net to pay off debt should you overextend yourself.
Pay bills early.
Some lenders report your balance as of your last statement date rather than your actual due date. So by paying bills “early,” that is, before the statement date, you can help raise your score. Keep in mind that not all lenders follow this practice, so you should confirm the date your lender reports before using this method.
Don’t automatically erase “good debt.”
Once you’ve completed your final mortgage or car payment, it can be natural to want that large debt off your credit report once and for all. However, provided you paid your debt off as agreed, a history of debt that you’ve handled well is good for your credit, so it can actually hurt you to rush to get this history taken off your report.
Beware credit repair companies.
If companies make promises to “erase your bad credit” or “create a new credit identity,” you may want to be skeptical of their practices—the FTC says these are likely signs of a scam. Even if you do find a legitimate credit repair company, they don’t have the authority to do anything you can’t do yourself, and if you do it yourself, you don’t need to put yourself further in debt by paying a credit repair company.
Consider alternative ways of building credit.
If your score is low enough that you’re consistently being denied for credit, you can consider signing up for a secured credit card or becoming an authorized user on someone else’s card. Becoming an authorized user allows you to essentially piggyback off the credit activity of the main cardholder while having the account added to your credit reports. As an authorized user, you should check with the credit bureaus to make sure the card activity is being reported on your account. Provided the account has positive activity, you can improve your score without needing credit approval. However, keep in mind that if the primary cardholder starts missing payments or going over the credit limit, it can be damaging to your credit as well. It’s important to make sure you trust the primary cardholder and know they have good financial habits before considering this option.
By signing up for a secured credit card, you can use “credit” that is directly tied to a bank account or another preset amount required by the company. Unlike a debit card, however, the payments still function as credit payments in that they aren’t taken directly out of your account—you have to make payments. Make sure your lender is reporting your activity to a credit bureau so that you are actively building credit. After a period of time (usually at least a year), some lenders will let you move up to an unsecured card, and if not, you’ve still been building positive credit.
Don’t open new accounts just to improve your “mix.”
Some people think opening an account of a new credit type, such as an installment loan if all your previous history is with revolving credit, will boost their score. While it’s true that credit bureaus will consider your mix of credit, it’s not usually a key factor in determining your score unless you have very little other information in your report. It’s generally not a good idea to open a new credit account simply for the sake of opening one—it just gives you one more bill to pay each month.
