Improving Your FICO Credit Score
No matter what your credit score, you can develop a plan for improving it (there’s always room for improvement).
There are no specific rules governing either how long it takes for a credit score to increase or how many points it can go up during any set period. Depending on how debt is handled – from mortgage payments to credit card bills – your score can change from month to month. Most people, however, won’t see their score go up more than about 30 points during any three-month period.
If you have a low score, you can work to improve it by paying all bills on time and paying down the balance on credit cards. That means paying not just the required minimum amount listed on your statement but gradually paying off the entire outstanding balance.
Keep in mind, though, that certain things may impact your credit record longer than others. For example, filing for bankruptcy will continue to tarnish a credit score for seven to ten years. Defaulting on a loan will drag down a score for seven years from the date of the last payment on that account.
Remember, while paying off credit cards and loans is good for a credit score, closing accounts altogether is not. A good credit history is one that includes one or two loan accounts that have been opened and used responsibly for a long time.
Get a Copy of Your Credit Report
You can’t begin repairing your credit until you know exactly where you stand. Obtain a copy of your credit report from each of the three major credit bureaus to find out which accounts are acceptable and which need work. Under the Fair and Accurate Credit Transactions Act, you can obtain one annual free copy of your credit report. For more information visit www.annualcreditreport.com or call 877-322-8228. You will have to pay a fee to get your credit score.
- Clean up your credit report. If your credit report contains incorrect information, you have the right to have it removed. Your credit report will include information about disputing inaccurate information with the credit bureaus.
- Have the credit reporting agencies remove incorrect information. Obviously, if there is incorrect information in your credit report that is to your advantage, don’t ask the credit-reporting agency to remove it. However, very rarely is incorrect information beneficial to you. Periodically check your credit report to verify accuracy of content. If there is incorrect information that negatively affects your credit score, contact the credit reporting agency and have it removed.
- Call your creditors. They may be the last people you want to talk to, but you’d be surprised at the help you might receive. Talk to your creditors about your situation. Many of them have temporary hardship programs that will reduce your monthly payments until you can get back on your feet.
Rethinking the Big Picture – First Steps First
Stop using your credit cards. In a bad credit situation, one of the worst things you can do is continue accumulating debt by making credit card purchases. Put your credit cards away until you have more control of the situation.
Pay your bills on time. Paying your bills on time is the single most important factor in determining your credit score. Since recent history carries more weight than what happened five years ago, getting in the habit of making on-time payments is an incredibly powerful way to start rebuilding your credit rating.
If you have a low credit score because of late payments in the past, you can start to raise your credit score by making your loan payments on time.
Similarly, delinquent payments can devastate your score. Missing even one payment can knock 50 to 100 points off a good score. Skipping payments for a single month on all your bills can lower your number from a respectable 707 to the range of 560 to 630.
In an effort to avoid late payments, consider putting as many of your bills as possible on automatic payment. Most mortgage lenders, utilities and phone service providers are happy to take their payments directly from your checking account each month. Online bill-payment systems are another way to ease the monthly check-writing chore, and many provide reminder services so you don’t forget a bill. Many computer software programs have reminders as well.
If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your credit score. Remember, your payment history makes up 35% of your credit score. Getting current on your delinquent accounts will have a great impact on your credit.
Pay more than the minimum payments. The credit score formula was designed to measure the likelihood of a borrower to pay back a loan. If you are simply making the minimum payments on your credit accounts, how likely is it that you have the financial capacity to increase your debt load with a new loan? Alternatively, if you are making more than the minimum payments, isn’t that de facto evidence that there are extra funds in your budget? One of the surest signs that a borrower has reached the limit of his debt load capacity is a pattern of merely paying the absolute minimum due. Double up on your payments to raise your credit score.
Pay down your debts – and consider charging less. Pay down the maxed-out credit cards first. You’ll get points deducted from your credit score any time you charge more than 50% of the limit on any kind of credit card.
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. The more debt you pay off, the wider that gap and the better your credit score.
Your credit card issuer looks at your account once every month or so and reports the outstanding balance on that day to the credit bureaus. This snapshot doesn’t reflect whether you pay off that balance a few days later or whether you carry it from month to month.
If you plan to apply for a mortgage, car loan or other major credit account in the next year, start paying down those balances now. And, if you’re in the habit of charging everything in sight to your credit cards – to gain more frequent flyer miles, for example – consider switching more to cash in the months before you apply. Depending on your situation, the loss of a few miles could be more than made up for by a better score and a lower interest rate.
Pay off debt rather than moving it around. The most effective way to improve your credit score is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score. If you don’t have the money on hand, sell some of your belongings to speed up the process. It will be a sacrifice, but the financial freedom you gain will be worth it.
Transfer balances if necessary. It is quite normal for many people to carry a high credit card balance on a low- or no-interest credit card, and simultaneously have a very low or no balance on their high interest credit cards. While this makes perfect sense from a financial standpoint, from a credit score standpoint it doesn’t.
Let’s say you have four credit cards, each with a $10,000 limit. Three of those cards have a zero balance, and the fourth has an $8,000.00 balance. This will lower your credit score because one of the cards is at an 80% outstanding credit to available credit ratio. To get a higher credit score, you should transfer the balance evenly among all four cards, resulting in a 20% ratio on each card. This one simple step will give you a higher credit score.
Learn to spend less than you can afford. The amount you owe is the second largest component used in determining your credit score. If you consistently spend all that you can afford, your amounts owed will be higher, your credit ratio of debt vs. available credit will suffer, and your credit score will be lowered. To get and keep a very high credit score, you must learn to not only spend within your means, but spend even less. Overall, you will raise your credit score by doing this and have extra income available to save and invest for your future.
Negotiate with lenders and collection agencies. If you currently have blemishes on your credit report from previous late payments, it is possible to negotiate with a lender or collector to remove the late payments from your credit report. The smaller and more local the lender is, the more likely you will be to succeed in your negotiations. This is the most effective way to raise your credit score significantly in a short period. Collection agencies usually are paid on commission and aggressively try every avenue to collect a debt (and get paid for their work). Be sure to get your agreement in writing; you can be promised anything by a collection agent, but enforcing a verbal promise after you have paid could be impossible.
Negotiation is an art, not a science. There are no exact rules to follow that guarantee success. However, there are some things you can do that are more likely to bring a favorable outcome. Be courteous and polite. Collectors work in a tension-filled environment and constantly deal in conflict. Be extra kind and polite and appeal to their human decency. They may look favorably on you and remove items without need for negotiation. Businesses also will be likely to remove negative elements from your credit report if it is their best interest. The more significant your account, the more they have to lose, and the more likely they are to respond favorably.
When negotiating to remove derogatory information from your credit report, ask what it will take and what can be done. Oftentimes, a lender will offer a solution that hasn’t occurred to you. Think outside the box, and your credit score will reap the rewards. If you are not successful at removing negative items, you may want to hire a specialist.
Still with me? In the next article, we’ll look at some practical ways to reduce the amount of debt you carry with, as always, an eye toward improving your credit score.