Unless you’re in the rare group of folks with an 850 credit score, seeking improvement to that important 3-digit number should always be the goal. But, bringing your credit score up can be a challenge, especially if you’ve made past credit mistakes. There are a few tried and true tricks to improving your credit score: these 12 steps are a great way to get started.
1. Check your credit report
Checking your credit score is crucial – apart from gauging your overall credit health, it helps you identify unusual or false activity on your credit report. Finding a discrepancy can alert you about anything from minor mistakes to full-on identity theft, both of which will have an impact on your credit report.
You can nab a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once a year at annualcreditreport.com. Multiple credit cards now provide to their customers credit score access on their monthly statements, too.
Start by looking for errors that lower your credit score and take action to correct them.
"You want to pull those three reports and make sure that everything is 100 percent accurate," says Amber Stubbs, managing editor of CardRatings.com. "We recently conducted a poll that showed 75 percent of respondents found errors on their credit report," says Stubbs.
When checking your credit report, pay special attention to the names of companies. Credit card issuers sometimes make mistakes, and collections agencies frequently report negative information about consumers with similar names. Follow each credit bureau's instructions for issuing a written dispute on any trade line you don't recognize. Eliminating negative reports can cause double-digit gains to your credit scores.
Next, review the negative factors in the report and focus your attention on improving them, such as paying bills on time or reducing spending. Keep in mind that it can sometimes take months for changes in your credit history to reflect on your credit report. Be patient: remember this can be a year-long effort, or longer.
2. Pay your bills on time
If you're trying to make up for past credit mistakes it is imperative to 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."
As an alternative to snail mail, you can set up automatic payments using your bank's online bill pay service or sign up for e-mail alerts from your credit card company if you have trouble paying bills before the due date.
Once you perfect your timing, you might get a credit score boost. “Changing your payments can impact your credit score even if you can't increase the amount you're paying off”, says Barry Paperno, consumer affairs manager for MyFICO.com.
"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.
3. Get caught up on past-due bills
If you’ve missed a payment, get current as soon as you can. Late payments can lower your score by as much as 100 points, and it may take quite a bit of time for this black mark to fade from your credit report.
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."
Of course, while paying off a collection will increase your score, be aware that the record of a debt having gone into collection will stay on your credit report for seven years.
After you've eliminated factors bringing your score down, Moore advises consumers to be vigilant about their bills to build positive history.
4. Keep balances low on your credit card
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 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 the best credit cards, Stubbs says that card holders should utilize 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.
Of course, it's better to pay off your debt instead of continually transferring it. While a balance transfer to pay zero interest or a lower interest rate on your debt can be worthwhile, make sure you pay down the balance before increasing your debt load. FICO says paying down your overall debt is one of the most effective ways to boost your score.
5. Don't close paid-off accounts
Closing an unused credit card account can have many adverse effects on your credit:
- It can reduce your available credit, which will lower your available credit and up your utilization rate, ultimately lowering your credit score.
- If you’re planning to close an older credit card, your credit history will be affected. The longer your credit history, the better your credit score.
"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 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.
Thirty-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.
A quick way to improve your credit utilization is to ask for a credit limit increase.
“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," Deborah McNaughton, author of "The Essential Credit Repair Handbook, says. Keeping your utilization between 1 and 10 percent will give you a better shot.
6. Use it or lose it
Most credit card companies report the last 24 months of account activity. If you have an open line of credit that you haven't used for a while, you could be hurting your credit score. Not using your account can also lead to your account being closed in as little as six months in some cases, which can lower you credit score as well.
Automating a monthly bill payment through your credit card, like an electric or cable bill might seem like financial sleight of hand. But even this small amount of activity on a formerly dormant credit card can boost your credit scores.
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. And if you've behaved yourself, card issuers could raise your credit score for you, says McNaughton. 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
This process generally only works once per lender, but can improve your credit score significantly.
8. Shop for new credit sparingly
If you are shopping for a mortgage, a car loan or a credit card, lenders typically pull your credit report to see if you qualify and what rate they will charge you. Too many inquiries over time can negatively impact your score, but if you cluster these applications within a few days or a week, the FICO scoring system will recognize that you are comparing rates for a single new loan or credit card rather than attempting to open multiple new lines of credit.
Only apply for new credit when you actually need it and not simply to boost your available credit. Opening several new credit accounts in a short time frame can lower your score.
In addition, have a mix of credit types. FICO prefers to see consumers with both installment loans and credit cards. If you are repaying student loans or have a car loan or a mortgage, then having one or two credit cards is also a good idea. While having too many credit cards can be a negative factor, you should have at least one to prove you can handle credit appropriately.
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 Paperno.
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. 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.
11. 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.
In some cases, the best remedy for your credit score may be to just continue being responsible with your payments, and wait it out. While small blemishes like credit inquiries will fall off of your report within one to two years, 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.