Find out 10 tried and true tips for improving your credit score.
Credit scores can range anywhere from 300 to 850, with almost 60% of individuals holding credit scores between 650 and 799 (1). The higher your credit score, the easier it will be for you to obtain a student or personal loan, as well as obtain a low interest rate on that loan. Conversely, if you have a low credit score, loan officers will hesitate before granting you a loan. If a loan is given, it may come at a very high interest rate. This could result in you paying tens of thousands of dollars in interest, especially if the loan you obtain is for a large purchase, such as a house.
However, you don’t have to live with bad credit. In fact, there are several different ways in which you can start improving your credit immediately. The following are 10 easy tips for improving your credit score:
1. Start paying down your debt. The Fair Isaacs Corporation (FICO) calculates your credit score using a variety of factors. One of these factors is your debt-to-income (DTI) ratio. In order to calculate this ratio for yourself, simply divide your monthly fixed expenses (e.g., mortgage, rent, credit card bills) by your gross income (before taxes and deductions). If your DTI is greater than 36%, your credit score will decrease. Ideally, you should have a DTI no higher than 20% in order to raise your credit score.
2. Get secured credit cards. Another way to improve your credit score is to increase your revolving credit. Many consumers do this by applying for and obtaining credit cards. However, if your credit score is especially low, you may have a hard time obtaining a regular credit card. One way around this difficulty is to obtain a secured credit card. Secured credit cards are usually offered by banks and require that you deposit money at the institution. This way, if you default on your credit card payment, the bank can use your deposited money to pay off your debt. Of course, if you do not default on your debt but pay it in full every month, your credit score will rise.
3. Get department store credit cards. Major department stores (e.g., JCPenney) offer consumers credit cards that can be used in the store. Such credit cards are limited in terms of purchase power; however, they do increase your revolving credit line. If you make sure to pay these credit cards off every month, they will improve your credit score.
4. Get a passbook loan. Passbook loans are often provided by banks and use the customer’s savings account as collateral. Credit bureaus classify passbook loans as installment loans, such as you would obtain for a car or boat purchase. Installment loans, if paid on time each month, can really work towards improving your credit rating.
5. Maintain old credit accounts. You may be tempted to close old credit card accounts that are no longer in use. However, those accounts verify your credit holding seniority and help maintain your rating. Also, because you have held those accounts for a significant amount of time, your credit limit on your credit cards may be quite high (i.e., these cards give you a high revolving credit line). Rather than close your old credit card accounts, simply cut up or put away those associated credit cards.
6. Obtain a copy of your credit report. By law, you have the right to obtain a free credit report once a year from the credit bureaus of Equifax, TransUnion, and Experian. It is imperative that you obtain your yearly credit report and carefully look it over for any omissions or mistakes. If you disagree with anything that is recorded in your credit report, notify the respective credit bureau immediately.
7. Submit rebuttals as needed. The Fair Credit Reporting Act allows you to provide 100-word rebuttals to be included in your credit report in order to explain why you were delinquent on a loan or have a high credit card balance. Some credit bureau web sites will even help you write your rebuttal(s). While such statements won’t help you obtain a home loan (because it is largely an automated process), they can work in your favor when someone is physically looking over your report (e.g., prospective landlord or boss).
8. Guard yourself against identity theft. Identity thieves prey upon consumers who give their credit card numbers over the phone or via insecure Internet lines. Even if you are fairly certain that your accounts are safe, don’t leave your credit cards where others can find them. Also, be sure to either shred or burn confidential information such as bank statements and credit card bills. Change your login passwords at least once every 6 months, and don’t create passwords that are easily guessed, such as passwords based on your name or birthday.
9. Organize your finances. The surest way to lower your credit score is to lose track of and forget to pay your credit card and/or loan bills. To combat this problem, have all your financial statements and credit card bills organized in one place. If needed, use an online tracking program, such as the one offered through Mint.com, to remind you of when credit card and other bills are due.
10. Seek help when needed. Don’t wait until you have collection agencies calling you night and day before you obtain credit card counseling. If you are already doing everything in your power to lower your debt and get your spending under control, yet you are still falling behind, consider enlisting the aid of a lawyer or credit counselor. Such professionals can negotiate a lower debt repayment amount, a lower interest rate, or even both. Just make sure that your credit counselor is certified by the Council on Accreditation.
1. MyFICO: About Credit Scores
Halina Zakowicz (Hally Z.) is a featured Business & Finance contributor on Associated Content. She also owns and operates Your Money and Debt, a personal finance blog.