If you’ve been keeping up with the news – or even if you haven’t – then you should know how important it is to be familiar with your credit score. When you apply for a mortgage or attempt to secure an auto loan, that one three-digit number will be the deciding factor for your approval or rejection. Further, the threat of identity theft is making it increasingly important that you stay abreast of your credit report
Essentially, your credit score tells a potential lender how much of a financial risk will be taken on when you are given a loan. The credit score itself is a composite of several different aspects of your credit report, including the following:
- Payment History
- Amounts Owed
- Length of Credit History
- Types of Credit Used
- New Credit
Your payment history weighs the most – approximately 36% – in determining your credit score.
Once you’ve learned your credit score, you can begin to concentrate on improving upon that number. The current average credit score for Americans is 723, which is down six points from the year 2000. A score over 680 will be considered a low risk for potential lenders, while a score under 600 or 620 will be considered a high risk. Generally speaking, if your credit score is under 700, it could stand to be improved.
1. Stay Current
Obtaining a regular copy of your credit report – with the credit score attached – is the first step to making improvements. It is impossible to know whether your efforts are reaping results without actually seeing the changing numbers. This will also serve as motivation to continue diligently working on your credit score.
You should also be obtaining a credit report from each of the three credit bureaus. Your report with Equifax may differ widely from your score at TransUnion, which means that one bureau will not give you all of the information you need.
2. Dispute Any Mistakes
Recent statistics have shown that there are mistakes on approximately 46% of all credit reports. Yours could have several mistakes, or none at all. Typically, the longer your credit history, the more likely that there will be errors on your report.
If you find an account on your report with which you are unfamiliar, or if you see debts on the report that aren’t yours, lodge an immediate complaint with the credit bureau. They will launch an investigation into the account, and will come back to you with their resolution, if any.
3. Make a List
Make a list of all of the negative aspects of your credit report, and determine exactly how much you owe. If you have several delinquencies, don’t panic! List them in order from the largest sum of money to the smallest.
Seeing this information on paper in front of you will be motivation to make the necessary corrections, and will also give you an idea of the amount of work needed to make appropriate repairs.
4. Contact Lenders
When you have a comprehensive list of all of the money you owe, call each of the lenders and ask to set up a payment plan. If several of them are credit cards, you may be able to negotiate a lower interest rate. If not, you might consider transferring the balance to a credit card with a lower APR.
In most cases, lenders want to recoup their money – bottom line. Knowing this, you have a bargaining chip for making deals with them for repayment. Advise them that you are unable to pay the full amount, but that you would like to begin making good on the loans or lines of credit.
5. Consider Piggybacking
If you have very little credit history or very poor credit history, ask a parent or a trusted friend to add your name to their credit card. If they agree, you don’t have to use the card, but their superior credit history will begin to reflect on your credit score.
6. Keep Longstanding Accounts
Since the length of your credit history is a factor in determining your score, closing longstanding accounts can actually hurt the score. Even if you are no longer using a credit card, keep the account open so that the history will still be available. It will continue to reflect in your report as “Paid As Agreed”.
7. Keep A Balance
Although you don’t want to keep a large balance on your credit cards, it will actually help if you keep a small balance on one or more cards. Part of your credit score is determined by your ability to effectively manage debt. If you keep a small balance, but continue to pay more than your minimum payment, it will reflect positively on your score.
8. Avoid Late Payments
Even if you pay your debts regularly, if your payments are not on time, you will suffer the consequences. Instead, send small, regular payments to make sure that your lender is satisfied. Even if you can only afford the minimum payment, send it on. Late payments will result in lowered chances of securing a mortgage, loan or line of credit.
9. Get Rid of Cards You Don’t Need
If you don’t use a credit card, get rid of it. Rather than closing the account, just put it in a safe – preferably locked! – place where you will not be tempted to use it. Ideally, you should carry only one credit card on you for emergencies to avoid impulse purchases that you can’t afford.
10. Write a Note
Many people don’t know this, but you are allowed to put notes in your credit report. Explaining a particular delinquency can give a heads-up to future lenders, and can increase your chances of approval for certain loans. Be as brief as possible, and don’t go into great detail. Just explain the delinquency as succinctly as possible.
These tips will help you to improve your credit score, and getting started now will put you back on the right track to financial success. Continue to order your credit score on an annual or semi-annual basis so that you stay on top of your score and your report. File complaints with the credit bureaus as soon as you identify a discrepancy and contact lenders of overdue accounts. This will avoid any mishaps in the future.