If you want to save big money on a big loan, do your homework, say the experts. Raising your credit score by as little as 40 points could qualify you for a lower interest on a home mortgage or an auto, student or personal loan.
Think of it this way--if you take out a $50,000 loan for 15 years with a 7 percent interest rate you will pay nearly $5,000 more in interest than if you borrow the same amount at 6 percent.
Whether you’re about to apply for a loan or if you just want to strengthen your finances, tackle these 14 action items to get your credit score and credit report in top shape.
1. Pull your report
Amber Stubbs, managing editor of CardRatings.com, says that future borrowers should get a copy of their credit report from the three major credit bureaus and take a glimpse at what their lender will see.
"You want to pull those three reports and make sure that everything is 100 percent accurate," Stubbs says. "We did a poll recently where 75 percent of respondents found errors on their credit report."
Errors, Stubbs adds, can range from minor mistakes to full-on identity theft and can take anywhere from 30 days to years to remedy.
Future borrowers can nab one free report each year from each of the three major crediting bureaus at AnnualCreditReport.com, but will have to pay a small fee to pull their credit scores. However, it’s becoming easier to find free access to your credit score--multiple credit cards now provide to their customers credit score access on their monthly statements, and a growing number of websites offer free credit score access as well.
2. Establish credit
The easiest way to lose points on your credit score is to not have enough credit, says Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling.
"[You need] a minimum of three active lines of credit for credit scoring models to have enough data to create your score," she says.
FICO, the firm that created the FICO credit scoring model, reports that not having enough credit can hurt you in two ways--by reducing the length of your credit history, which counts for 15 percent of your credit score, and by preventing you from having a mix of revolving and installment credit accounts, which accounts for 10 percent of your score. Those with little credit may not qualify for the best credit cards for high credit scores, but can start by getting a standard platinum card or a secured card.
3. Eliminate the collections
According to FICO, payment history makes up the largest chunk of your credit score--a walloping 35 percent. Paying your bills consistently and on time will have a tremendous impact on your score, but so will unloading negative credit history, says Jeannine Moore, director of marketing and communications for Consumer Credit Counseling Service of San Francisco.
"If you have an account that's gone into collections, you're going to have to pay it," Moore says. "The more you can pay those off, the further in the past they're going to be and the better your score will look."
After you've eliminated factors bringing your score down, Moore advises consumers to be vigilant about their bills to build positive history.
4. Pay down debt
Even if you're paying off your cards each month, you could still lose points on your credit score if your balances are high.
"Paying your credit card balance down can give you a big impact very quickly," says Amber Stubbs.
Since nearly one-third of your FICO score is determined by amounts owed, keeping your balances in check is crucial. To qualify for the lowest interest rates and best credit cards, Stubbs says that card holders should keep their balance to no more than 10 percent of their credit limit. If you can't pay off your debt, you can spread your debt out over several cards, keeping the balance for each card as low as possible.
In some cases, the best remedy for your credit score could be to do nothing. While small blemishes like credit inquiries will fall off of your report within one to two years, Jeannine Moore says that larger mishaps like bankruptcy can take seven years or more.
"The past two years will have the most impact on the credit score," says Moore, adding that borrowers should ensure that their last few years of history are squeaky clean before applying for a loan.
6. Pay bills immediately
If you're trying to make up for past credit mistakes, pay your bills immediately, especially if you're receiving them by mail. Credit card issuers are required to give you 21 days to pay your bill (in accordance with the Credit CARD Act of 2009), but they're not required to factor in how long that bill might languish in the mail.
"We always admonish that [consumers] should allow seven to 10 days for snail mail," says Gail Cunningham. "If the bill arrives in my hand on day 10, I better pay it quickly so that it arrives in their hands by day 21."
7. Ask for help
If you need help, ask for it. All the best credit card companies offer hardship programs that can reduce your payments and get you out of credit trouble faster. If you have a one-time slip-up but maintain good credit history overall, Stubbs recommends asking for a pass.
"If things haven't been going well one month, call [your credit company] and say ‘Hey, I've brought my account to current. Can you report that to the bureau and take that 30 days late off?’ Sometimes that works," she explains.
Since even one late payment can reduce your credit score, taking the time to ask for help can help you save big bucks when it comes loan time.
8. Get some goodwill
Behave yourself and card issuers could raise your credit score for you, says Deborah McNaughton, author of "The Essential Credit Repair Handbook." If you've only got a few dings keeping your credit score down, request a "goodwill deletion."
"You're basically requesting that they remove a negative item because you're such a good customer," she says. "If it's something that's happened once or hardly ever, the more years you have with that creditor, the more likely they are to help you out."
9. Notice the notices
Debt can potentially vanish with a single financial windfall. Bankruptcies, judgments and tax liens stay on your credit report for longer.
"Judgments remain on a [credit] report for seven years from the filing date and tax liens can remain on the report indefinitely if they're not paid," says Barry Paperno, consumer affairs manager for MyFICO.com.
Public notices like tax liens, judgments and bankruptcies can lower your score by 100 points or more and wreak the most havoc for the first two years they're there, adds McNaughton.
10. Rock the oldies
"Clients come to us wanting to pay off their credit card and once they do, they call the company and close it out," says Deatra Riley, financial education manager with CredAbility, a nonprofit credit counseling agency headquartered in Atlanta.
But be forewarned that closing unused credit lines can actually damage your credit. According to FICO, the length of your credit history accounts for 15 percent of your credit score, meaning that closing out an old card can hurt your credit.
"Closing out [an unused account] also reduces your credit utilization," adds Riley.
Another 30 percent of your score is determined by credit utilization--how much you owe in relation to the amount of credit you have available. Cancel a high-limit card and your utilization could skyrocket.
11. Raise the roof
A quick way to improve your credit utilization is to ask for a credit limit increase.
McNaughton says that this tactic works best "if your income has been stable and you've been making your payments on time."
She adds that when card issuers review your account for a credit limit increase, they'll look at your full credit report, including how much you owe on other cards.
"If you're maxed out across the board, there's a good chance that you won't get your [limit] increased," she says. Keeping your utilization between 1 and 10 percent will give you a better shot.
12. Perfect your timing
Changing when you send in payments can impact your credit score even if you can't increase the amount you're paying off, says Paperno.
"Let's say that you have a card with a $1,000 limit…let's say this month you charge $500, but instead of waiting to get your bill, you pay half. What's going to show up as your balance will be $250, not $500," explains Paperno.
Instead of winding up with a 50 percent utilization that can drag your credit score down, paying off half of the balance early means a sweet 25 percent utilization which can bring your score up.
13. Explore the loan zone
Your credit cards might have sky high interest rates, but other loans don't. Pulling money from home equity, cash value life insurance or a personal loan can soothe the credit card demons at a substantially lower interest rate.
While loans against a life insurance plan don't require credit checks, opening a new home equity or personal loan can put an inquiry on your credit report and in most cases lower your score by up to five points, says Paperno.
"Inquiries appear on your credit report for a couple of years but they only impact your score for the first year," Paperno adds.
14. Don't be too quick to settle
Debt management organizations can lower your interest rates, reduce late payment penalties and negotiate a workable payment plan with your creditors, allowing you pay down debt quicker and raise your credit score. But debt settlement, while it may sound similar, is a whole different beast.
"Debt settlement is when you take the total amount that you owe and you pay a percentage towards it," explains Riley. "That may have a severe impact (on your score) because you're not paying off the total amount of debt."
Settling can also have tax ramifications. The IRS reports that consumers who have more than $600 in debt dismissed must pay taxes on the total amount of debt canceled. While both debt management and debt settlement work to eliminate how much you owe, only debt management programs will help you build credit.
If you've run out of options and are thinking about entering a debt settlement program, consider how it will impact your taxes and credit score before taking the plunge.