Many have New Years Resolutions and goals improve their credit score, but how exactly does one go about improving your credit score? This question brings immediate feelings of dread and anxiety for a lot of people, but it doesn’t have to. If you need to improve your credit score, this article is for you. Understanding credit, how it works and how it is scored, is essential to a healthy financial life and future. If you are a renter and homeownership is a goal for you, having a healthy score is a crucial factor in getting pre-approved for a loan. Here are 8 steps that you will want to follow to improve your credit:
Step 1: Get a copy of your credit reports. You can pull your own credit report once a year from each of the 3 major credit bureaus at no cost. If you time it right, you can pull from one of them every 4 months in order to monitor your progress throughout the year.
How is your credit score calculated? This may be helpful when reviewing your credit reports. Your score is calculated using several pieces of credit data including:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Credit mix
Step 2: Check your report for errors. Reportedly, nearly 25% of credit reports have errors that can negatively impact your score, so it is important to check for ay of the following:
- Incorrect personal information- including misspellings and wrong addresses
- Incorrect public records- including bankruptcies and foreclosures
- Missing Accounts- accounts that should be on your report but are not
- Incorrect Accounts- accounts that do not belong to you
- Inaccurate accounts- accounts that say they are open when they are closed
- Inaccurate status- accounts listed as "closed as grantor" or incorrect delinquency
- Duplicate accounts- accounts reported twice
- Incorrect inquiries- inquiries reported on the wrong credit
- Fraudulent Activity-activity on your report that is fraudulent
Step 3: Dispute any errors. Any errors must be disputed with each credit bureau. Here’s a good article from the Consumer Financial Protection Bureau on how to dispute errors on your credit report.
Step 4: Pay late and past due accounts. Make sure to pay the minimum balance on any payments and do not skip any payments. Don’t forget that delinquent payments can stay on your credit report for up to 7 years.
Once your balance hits 30 days past due, your creditor can sell the debt to a collection’s agency. This will have a HUGE impact on your score. If you already have collections on your credit report, call the agency that now owns it to work out an agreement.
Oftentimes they purchase the debts for pennies on the dollar so you can renegotiate your balance to get them paid off. You may also be able to negotiate a pay for delete, an agreement where you pay an amount for the creditor to remove a collection account from your credit.
Step 5: Increase your credit limits. You will receive a credit limit on your revolving credit. This tells you the maximum you can spend before paying off the balance. If you are able to have your limit increased, it can help to improve your score as it will decrease your credit utilization ratio (how much you owe on all accounts divided by the total credit limit available to you.)
Do NOT use your full credit limit: It is recommended by experts to maintain a threshold of 10% (only use 10% of your limit). Your score will not be negatively affected until you are utilizing 30% or more of your limits, but remember, we are trying to control debts. limit available to you)
Step 6. Decide which accounts to pay off first. There are two approaches to paying off balances, and you should pick the one that makes the most sense for your situation.
1) Pay off the account with the highest interest to avoid paying more in interest than needed. Minimal use of the highest rate is recommended.
2) Pay off your lowest balances to avoid accruing interest.
Step 7: Open a new credit card. This is NOT to take on additional debt. The purpose here is to increase your credit limit and reduce the utilization ratio. Your credit improves as this ratio decreases. When you are considering another card, make sure you review their annual fees and interest rates to ensure this is worth it to you.
Do not open multiple accounts at one time, take it slow to not negatively impact your credit as that makes you appear as high risk to lenders.
Don’t forget that the age of open accounts is considered also, so keep those old cards open.
Step 8: Pay on time. Making timely payments shows your creditors that you are borrowing responsibly. In order to achieve and maintain good credit, make it a habit to pay on the same day each month. Set up auto payments to be sure at least the minimum payment is paid on time.
By following these steps, you can make significant impacts to your credit score within 3-6 months!