5 TIPS ON IMPROVING YOUR CREDIT SCORE
If you've pulled your credit score and are disappointed by what you see, here are some simple things you can start doing now to improve your score.
1. Get it right
Accuracy is the first thing to address and the fastest way to boost your score. Find and fix any mistakes that could be pulling your score down. Your credit score is based on the information contained in your credit reports. "For someone who has never seen a credit report or hasn't checked in several years, I recommend getting all three and looking at all of them, because each contains different information," says McClary. For those who check regularly, use the free credit reports to monitor your accounts. Stagger your requests for the free reports so you see one every four months. "With ID theft running rampant, it seems like you need to check more often these days," McClary says. "Maybe once a year isn't enough anymore."
2. Pay your bills on time
Paying on time helps build a healthy payment history. And, as the largest factor in determining your credit score (at 35 percent), it's the best way to rebuild damaged credit. Even if you've had credit problems in the past, depending on how many creditors were involved and how far past due your accounts were, a good 12-month payment history can usually produce noticeable results. "If you fell off for a few months, a year could get you back on track," says McClary.
Expect information about past-due payments to stay on your report for up to seven years. Your score can still improve during that time as long as you make steady, on-time payments. Seven years after the date of last activity the mark may drop off, but the avenues of collecting the money may not be closed. While the statute of limitations on reporting is seven years, the length of time for attempting to collect varies by state and a collector may file a lawsuit against you. In that case the negative mark will reappear as a judgment against you.
3. Step away from the edge
If you think you're doing everything right, take a look at the amount of your outstanding debt and your debt-to-credit ratio. Reducing your credit card balances will score you points and is especially important if you are flirting with the limit on any of your cards.
You never want to be maxed out, and ideally you'll be using only about 40 percent of your limit on any one card. Spreading debt between cards is better for your credit score than keeping it all in one place.
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Next, focus on the amount of outstanding debt (30 percent of your score). Together, outstanding debt and payment history account for 65 percent of your score. Pay off your debt rather than moving it around. "A lot of people like to play the balance transfer shell game. Closing out an account and transferring that over means that you're increasing your debt ratio. You're reducing the overall amount of available credit and driving up the balance on the other," says McClary. Ultimately if the credit limit is equal or higher on the new card, it would be a wash over time, but in the short term, this is not smart.
4. Commit for the long haul
Fifteen percent of your score is determined by the length of time you've held a credit relationship. Don't close any accounts if you plan to shop for a mortgage or other loan for which you'll need a good score. Opening new cards and closing old accounts negatively impact your credit score in the short run, so avoid making these moves shortly before applying for a large loan. Deciding when to close an account is a tough question, says McClary. "It depends on the overall mix of credit and how many accounts you close. I would stagger it out. Put as much time between those events as possible, because it will affect financing terms," he says.
While you'll want to have a couple of cards to develop a credit history, adding more credit card debt can be a dangerous thing, McClary cautions. "Limit the amount you get to two and keep balances low and pay them off quickly. It's not necessary to have more than a couple of credit cards, and be careful using them because life circumstances can change." Of equal importance is establishing a savings account to fall back upon.
5. Look before you leap
When you apply for a loan or a credit card, lenders check your credit. These inquiries can put a temporary dent in your credit score. Start your loan search by shopping and comparing rates rather than applying for a loan first and deciding later. If you can do all your shopping within the same month, all the better. Mortgage and auto loans are counted as one inquiry if they fall within a 45-day period in the FICO scoring model.
Inquiries have the least impact as far as overall weight. Inquiries, types of credit and the number of loans you have play into the remaining amount of your score.
"I'm always amazed at how people tend to concern themselves with someone making an inquiry when they should be focusing on their payment history," McClary says. "I think if you want to stop solicitations, opt out. But if the motivation for opting out is to have an impact on your credit score, then it's not efficient." Save a few trees, opt out.