By George Cole
If you have less than perfect credit, you understand how hard it can be to get approved for good financing. Unless you’re prepared to lose both an arm and a leg to high interest rates, you’d better do something about your credit before you try to finance your next large purchase.
“Doing something” about your credit score is easier than you think once you understand how the credit agencies use the FICO formula to calculate your score. (We covered how the FICO formula works last week. If you missed that article, read it here.) Once you know what factors influence this formula, you can begin making specific changes to improve your score.
There’s no quick fix – but there are a few rock-solid tactics you can use. Below are our favorite 7 do-it-yourself credit improvement strategies. If you ever feel overwhelmed or need additional advice, please let us know. We are here to help.
1. Give it time!
Removing and reversing inaccuracies and errors from your credit report can provide a quick boost to your score. But continued improvement of your score, and maintaining that good score once to earn it, takes patience and effort. Using consistently good credit habits is the best way to increase your credit score.
Keep in mind that delinquencies stay for on your credit report for 7 years, bankruptcies for up to 10, and credit inquiries for 2 years (we’ll talk more about inquiries in a bit). If the information is accurate, there really isn’t much you can do remove them from your credit report.
2. Check your credit reports regularly
Knowing what is on your credit report is critical. You are allowed to get 1 free copy of EACH report once a year. You should never have to buy a copy of your credit report! To keep tabs on your report throughout the year, request a copy from a different credit agency every 4 months. For example: get one from Equifax in January, Experian in May and then TransUnion in September.
To request your free copies, visit AnnualCreditReport.com. It’s the only credit report website approved by the federal government. Getting your own score is not considered an “inquiry” since you are not actually applying for additional credit, so it will not affect your credit score.
These free reports do not include your FICO score. But that’s not really the point, anyway. You want to check your credit report often to spot inaccuracies and errors. These can be the result of identity theft, an error in what a creditor reported, or even simple human error when someone at the credit agency was entering your data.
Check your credit report often… You can’t fix what you don’t know about!
If you DO want to know your score, TransUnion and Experian will provide it for $1.00 each. Equifax offers scores form all three credit agencies for $4.95. Just be sure to read the fine print… these reports are usually part of an initial trial offer for the credit monitoring programs offered by the credit agencies. If you don’t cancel before the trial period, you’ll be charged upwards to $20 per month.
However, professional credit monitoring services like these are not a bad idea, if they are affordable and can fit in to your budget. Getting on-the-spot activity alerts help stop fraud and identity theft instantly. Plus you’ll be able to get a close up look at your spending habits.
3. Manage your debt to credit ratio appropriately
Your debt to credit ratio, commonly known as your Utilization Ratio, is an important part of calculating your FICO score. It’s simply a measure of how much you owe compared to your total credit limit. If your cards are close to maxed-out, your utilization is high, and your credit score will be lower.
The target to aim for is 7% utilization, after your payment is made. So, if you have a $1500 credit limit, keep your ongoing balance under $105. You can use as much credit as you wish during the month, just be sure to make a big enough payment by your due date to bring the balance down below 7%.
Another way to reduce your utilization is by not closing accounts that are paid off. Yes, it would reduce the number of cards you have, which might raise your credit score in some cases, but more importantly, it DECREASES your available credit and INCREASES your utilization ratio.
4. Use fewer cards
Many people mistakenly think they must keep balances on many cards to show responsible credit management. But, having active balances on too many cards, even if they are relatively small, may lower your score.
Choose 1 or 2 “go-to” cards and use them for your purchases. While it is true that you can have up to 7 open credit card accounts without risking your credit rating (as long as the total balance is lower than 7% of your credit limit), be cautious because the more cards you have, the more likely it is for you to overspend.
While you are paying your cards down to that 7% goal, try to pay more than the minimum balance each month. Always make sure what you do pay is MORE than the interest you were charged. Otherwise you will be paying interest on interest the following month!
Keep the cards you do not use open to maintain your available credit for utilization calculations as explained in #3. Just be sure to “activate” them every 90 days with a small purchase like lunch or coffee so the creditor doesn’t close it due to inactivity.
5. Don’t play the balance transfer game
Transferring a balance every once in a while to take advantage of a low or 0% interest rate is a good idea, but don’t make a habit of it.
Moving you debt from card to card without paying it down will hurt your credit score.
6. When shopping for new credit (like for an auto loan or mortgage), concentrate your efforts over a period of 2 to 3 weeks.
Each time a lender checks your credit, and official “inquiry” is placed on your credit report. These inquiries stay on your report for 2 years. Having a lot of inquiries from different types of lenders or multiple credit cards makes you look higher risk. To lenders, lots of inquiries mean you are planning to accumulate lots of debt, and maybe overextend yourself in the near future.
However, when a series of related inquiries occur close together, like all from auto dealerships, they are considered one inquiry, and have less effect on your score. So when you shop around for a big purchase, devote effort to getting all the information you need over a short period of time to protect your credit score.
7. Pay ON TIME every month!
Having a consistent history of on-time payments is the most effective way to increase your credit score. If you are overcommitted and having a hard time coming up with the money to make your payments, get a second job, at least temporarily, until you catch up and save a little for a rainy day.
Many people, though, miss payments simply because they forget. This is easy to fix with a little technology. Set up payment reminders on your phone or favorite online calendar. Some banks also offer payment reminders through their online banking services.
If you have enough cash flow, you can set up automatic payments with each of your creditors. But be careful, if your automatic payments overdraw your account, you’ll rack up lots of fees from both your bank and your creditor.
Are you having trouble keeping up with your debts? Contact your creditors to see what they can offer for modified payment plans or talk with a reputable credit counselor, like NCES.
Improving your credit score, and keeping it up there long term, is well within your power. Follow the 7 tips above and you’ll be confidently on your way to a better FICO score, and a more secure financial future.