How can I improve my credit score? Why is my credit score so low? Is that a good credit score? What credit score do I need in order to qualify for a loan? How does that affect my credit score?
These are just some of the questions I’m asked about credit scores. There is no question that credit scores are important; but most people do not know just how important they really are. It’s not just a lender that looks at your credit score…did you know that insurance companies use your credit score to determine how much you will pay?
Employers are increasingly using your credit score to help determine if they should hire you. Banks use your credit score to determine if they should permit you to open a bank account with them, and cell phone companies will not give you a cell phone if your credit score is too low. The use of credit scores to determine your place in society is becoming more prevalent, so let’s look at some ways to get your credit score where it should be.
The tips below come from my personal experience, and I believe are the best ways of improving your credit score. In the 22+ years of working in the mortgage and real estate industry, I’ve had the opportunity to see thousands of credit reports and work with hundreds of people that needed help with their credit scores. I believe that everyone with a little time and commitment can have great credit scores. Even if your credit looks like a bad horror movie, in very little time you can be on the way to a good credit score. Some of my suggestions are simple solutions, and some, like my daughter Eliana use to say all the time when she was 5 “oh, I didn’t know that”…
Fix the errors
Fixing errors seems obvious, but most people don’t even look at their credit report until they need good credit, let alone fix any errors that might be on their report. 85% of all credit reports contain an error of some kind with a reported 25% containing a serious error.
You need to do this…obtain a copy of your credit report from the three major bureaus: Equifax, Experian and Trans Union. You can obtain a free annual credit report at AnnualCreditReport.com. Once you have your report, look it over and report any errors directly to the credit bureau(s) that have the error. I do not recommend calling them; do it in writing and keep copies. In most cases you can submit a request online. And one more thing…pulling your own credit from the bureaus does not affect your score.
You need credit to have good credit
The common thought is that credit scores are used to determine if you will pay your bills. I would suggest to you, that this is not the main use of credit scores, but they are most used to determine if you will buy goods and services and then pay for them. This is why if you only have one or two credit accounts, which you rarely use and pay them on time, you will never obtain a high credit score.
You need to do this…make sure you have a minimum of 3, preferably 4-5, credit accounts open that you use at least once every three months.
Pay your bills on time
All your bills need to be paid on time, even the accounts that seem, as some would say, unimportant. You have to pay all of your bills on time; one late on a credit card, store card, medical bill or utility account can lower your score by up to 100 points; so get those payments in. Even the parking ticket that you threw in the garbage will eventually make its way to your credit report and wreak havoc on your credit scores.
You need to do this…do one or all of the following: set up reminders on your calendar, have your creditors email you reminders, and set up auto pay for all of your credit accounts. Make a regular time of the week to pay your bills, and never skip your appointment. Resolve today that you will no longer pay your bills late!
Don’t close those accounts
I’ve heard from many of my clients that they closed one or more of their credit accounts because they thought it would help them to have better credit or higher credit scores. This is simply not true, and in most cases will lower your credit score. Remember, one of the primary goals of credit scores is to let companies know you will buy from them; when you close an account, you lower your purchasing power, which in turn will cause your credit scores to go down. It also works with older credit accounts that you do not use; if you don’t use them, they will no longer have a positive affect on your credit score.
You need to do this…don’t close older accounts. If you have multiple credit cards, use them on a rotation basis. Use them at least once every three months so they count positively towards your credit score.
Don’t run those credit card balances up!
What good are you to stores if you have maxed out your credit limit? When you’re spending close to your credit limit, it’s believed you might be experiencing financial trouble, and your credit scores will be negatively affected even if you make your payments on time.
You need to do this…never use more than 40% of the available balance (credit limit) on your credit card accounts, and request a credit limit increase at least once a year on each account.
Just say no to new credit accounts
Every time you open a new credit account it will lower your credit score for the next few months. Ask your self, “Do I really need this new account?”
You need to do this…once you have 4 or 5 credit accounts open, don’t open new credit accounts unless you need them and plan on using them regularly. Resist the urge to save the 10% that many stores offer you for opening a new account…remember their goal is to get you buying from them on a regular basis, so if you don’t plan on being a regular shopper, don’t do it.
It’s my credit, so stop pulling my credit report
The credit bureaus take into account the number of times you are having your credit pulled. Make sure you know when you are giving someone your social security number whether or not they are going to pull your credit. If you are always having your credit checked, you will negatively affect your credit score. There is an important exception…credit bureaus know the difference between someone that is shopping for the best terms for a loan and someone that is constantly applying for new credit; so go ahead and shop around, it won’t hurt your score.
You need to do this…be selective about what credit accounts you apply for. Make sure you really need that account. Don’t be afraid to shop for better terms; if you are looking for the best rate and have multiple companies order your credit, the bureaus will count multiple orders as one as long as it’s done within a short period of time.
Paying off collections
Pay off all newer collections and judgments as fast as you can. The most recent ones are negatively affecting your scores the most. I recommend paying off all collections, but wait on the older ones (greater than 24 months) if you are looking to buy a home or make another major purchase in the near future. Paying off older collections and judgments often lowers your credit score at first, but then over time will be a positive for you.
You need to do this…pay off those collections and judgments. If you have a bill that you cannot pay, work out a payment plan with the creditor before they send you to collection.
How long have you had that account?
The older the account, the greater positive or negative effect it has on your credit score. Having accounts with long histories shows stability and consistency. New accounts, or accounts with little history, don’t add much to your credit score.
You need to do this…be committed to that credit card you’ve had for many years. Plan on using one or two accounts for a long time and be consistent with them.
If you follow the tips above, you will soon have that ideal credit score that you want and creditors look for.
Found this helpful? Let your friends and clients know that it’s possible to improve their credit scores – who knows, you may gain a new client or a better place to hang out.
— Richard M. Hartian (@WinningAgent) May 8, 2014
Have a comment or question on credit scores? I encourage you to post them here.