Your credit score has a huge impact on your overall financial well-being. A good score will help you to buy a new car, purchase your first home, or just take a relaxing vacation overseas. However, without a good credit score, you will be saddled with high interest rates or unable to obtain any credit at all.
What’s worse, your poor credit may not even be your fault. A recent FTC study of the credit reporting industry indicated shocking results. Five percent of consumers had errors on one at least one credit report that was so severe it could lead to paying higher interest rates on loans and higher premiums for insurance.
This may seem like a low number, but consider this: around 20 percent of consumers who identified errors on one of their three major credit reports increased their scores so much that they moved into a lower risk tier, meaning they were able to qualify for lower interest rates.
How many consumers haven’t checked their reports to identify errors? And how much more could they be saving if they did? Thankfully there are legal, ethical ways to improve your credit report and score which will let you secure the best rates possible.
Step 1: Get a Free Credit Report from TransUnion, Equifax, and Experian
The first step towards improving all three of your credit scores is to order a copy of each report and review it for errors. A free credit report is available on a yearly basis to every citizen of the US.
You can order from each of the three major credit bureaus: Equifax, TransUnion, and Experian. Some states offer an additional free credit report. If you’ve been denied credit or employment due to your credit file, you can also receive a free credit history report even if you’ve already gotten a free report this year.
Step 2: Check for Accuracy
Once the report is in hand, read through it and make sure all of the listed information is correct. Many components go into factoring your FICO score.
Eliminating just one bit of wrong or negative information can cause your score to dramatically improve and increase your chances of qualifying for credit. Alternatively, you might find some missing positive information that could help increase your score, like a lower loan balance. Updating or adding the correct information could easily boost your score.
Your Credit Report Accuracy Checklist
- Incorrect amounts owed: If the amount owed is listed incorrectly, the report won’t accurately reflect your utilization or the amount of credit used. High utilization can negatively impact your credit scores.
- Accounts that belong to someone else: If you have no recollection of a debt, it may not even be yours. Any unknown debt should be disputed.
- Incorrect delinquencies: Items may list as being paid late, even if they were paid on time. Late payments damage your credit score and should be disputed.
- Inaccurate reporting of collections accounts: Collection companies are notorious for putting information on a credit report simply to extort money from unwary consumers. If the information is incorrect, it should be disputed.
- Duplicated collections accounts: An account or debt should only be listed once. If it is listed multiple times by the same organization or by competing organizations, all but one listing should be removed.
- Incorrect judgment information: If a judgment has been incorrectly listed, it should be disputed; judgments can hurt a credit score or impact your ability to secure a loan. Any inaccurate information about the judgment can be disputed, even if “most” of the information is correct.
Step 3: Disputing Inaccuracies
Once errors have been identified, they will need to be successfully disputed. As long as a negative item remains on the report, it will drag down your score. Therefore, the best way to improve your credit scores is to remove as many of these errors as possible. You can do this by disputing incorrect negative information with the credit bureaus.
Need Help Repairing Your Credit?
When a consumer seeks to dispute an item on their credit report, the business or entity who listed the item is required to prove that it is accurate. For collection accounts, a collection agency will have to provide validation or proof of the debt within 30 days of the request or remove the item. For best results, validation requests should be sent in writing, with proof of delivery.
If the company is unable to prove the debt, they are required to remove it. If they do not, the debt should be disputed with the credit reporting agency. A dispute can be sent in the form of a letter or online and requires the reporting agency to confirm the debt or remove it. Once negative information is removed, your credit scores should see an increase.
Step 4: Pay Your Bills on Time
Having a positive payment history on your credit report affects 35% of your score, making it the largest contributing factor. So the best way to get your credit back on track is to keep up with your monthly payments. Not all creditors report your timely payments, although credit card companies and mortgage lenders typically do.
If your account becomes 30 days delinquent or more, just about all creditors can report the late payment to one or more credit bureaus. That will dock your score significantly, and it just gets worse every 30 days.
Late payments can also lead to charge offs and collections, meaning your outstanding debt is sold to a collection agency. That doesn’t do any favors for your credit score, and can actually cause an enormous drop.
Set yourself up for success by enrolling in an automatic bill pay for your recurring monthly payments. You can either go through your bank or through each individual creditor. As long as you have money in your account, you can benefit from the peace of mind that all of your bills are taken care of on time. Then you can sit back and watch your credit score increase month after month.
Step 5: Pay Off Your Debt
The next most important part of your credit score is how much debt you have. There are a couple of different ways of tackling this section. The first issue is having installment debt versus revolving debt.
The difference is that installment debt has a set term with regular monthly payments. If you have a car loan, a mortgage, or student loan, then you already have installment debt. This is looked on more favorably than the other type, revolving debt. That’s associated with credit cards.
There’s no set monthly payment and you can pay off and take out more debt as you want to. It doesn’t look as good on your credit report because there’s no asset (like a car or house) tied to it. Help your score by focusing on revolving debt first.
Then, take a look at how much of your available credit line is used on each card. If a card is maxed out, your credit score is going to take a hit. It’s better to spread out your balances among several different cards (assuming the interest rates are comparable) rather than putting everything on one card.
Most experts recommend charging no more than 35% of your available credit. This is called your credit utilization ratio. If yours is higher than 35%, you’ll definitely want to work on getting that debt paid off as soon as possible.
For credit cards, avoid maxing out any one account. The same amount of debt spread out over multiple cards is weighted better than having a maxed out balance on one and no balance on the others. Shoot for keeping each account under 30% utilization. Assuming the interest rates and fees are all comparable, using that baseline can help you prioritize how you pay off your debt.
Step 6: Use Credit Responsibly
Once you have your debt under control, particularly your revolving debt, make sure you continue to use your credit in a responsible fashion. Using your credit card isn’t bad at all. In fact, since most credit card companies report on-time payments, it’s a great way to build a strong credit history.
Even if you don’t need to use your credit card (which is great), consider charging just one or two bills on it each month and making that payment before the due date. You’ll quickly rack up that payment history for your credit score.
If you’re having trouble getting a credit card because of your current history, don’t worry, There’s still a way to establish good credit with this technique. Get a secured credit card, which basically serves as a baby step towards a more traditional card.
With a secured card, you’ll put a certain amount of money into a separate account to serve as a security deposit. Your credit line then equals that amount, so if you put in $500, you then have $500 in available credit.
When you charge something, you still pay off your bill each month with funds outside of the security deposit. You get that money back when you close your card or upgrade to a traditional one.
Step 7: Keep Positive Accounts Open
Your credit score is also influenced by how long your accounts have been open, particularly the positive ones. Even if you don’t use a particular credit card and there’s no outstanding balance, consider keeping it open if you’ve had it for several years. Your score takes into account the average age of your credit cards because it indicates you’ve had a longer track record of payments.
If you’re new to having credit cards, there’s a way to get around this area. You can become an authorized user on someone else’s account. Then the entire history should show up on your report. So, if the credit card has been open for eight years, you’ll have that reflected on your own credit report.
On the flip side, if that person has a poor payment history, your credit score could be hurt. Plus, they’ll need to trust you that you won’t charge exorbitant purchases on the card and that you’ll pay off anything you owe. Or you could just not take a copy of the card so there’s no temptation.
It’s also worth noting an instance where you might not keep a credit card open just for the account age. That’s if you pay an annual fee for the luxury of using the card. If you get reward points that vastly surpass the cost of the fee, that’s fine. But if you’re paying $100 a year for a card you don’t use, it’s probably not worth having in your wallet.
Step 8: Minimize Credit Inquiries
A final way to improve your credit score is to hold off on frequent credit checks. This comes from applying for a number of credit cards and loans. Each time you apply for an approval from a separate creditor or lender, an inquiry is noted on your credit report. Each one adds up to a few points deducted from your score for a year. The inquiry itself will be listed there for two years.
However, if you are looking for the same type of credit within a several week period, then that’s counted as a single inquiry. Lenders appreciate that you want to find the best deal. But if you’re applying for a new credit card every single month, they’re bound to raise an eyebrow or two. So it’s best to apply for credit only when you need it, and think about it in a strategic manner.
Another Option: Reputable Credit Repair Services
In many instances, the only thing you’ll need to do is order a copy of your reports, and make a note of any inaccuracies that you want to have disputed. The credit repair companies do all the hard work of keeping up with validation letters, dispute notices, and all the deadlines involved.
The money you spend on credit repair is an investment in your financial future and well-being. If you need recommendations for professional credit repair companies you can trust, check out our reviews section for more information.