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Improve Your Credit Score: 5 Steps You Can Take This Weekend

by Shawanda Greene

Building an excellent credit history could take years. Fortunately, there are moves you can make within the next 48 hours that will get your credit score going in the right direction – up.

Despite what you heard, you don’t need credit. Last time I checked, credit didn’t make the cut onto Maslow’s Hierarchy of Needs. That said, you probably can’t afford everything you want on your salary alone. For instance, many believe it’s unrealistic to save enough cash to buy a house without a mortgage. (It isn’t.)

When the time comes to borrow money to purchase a home, start or expand a business, 0r buy a car, you want to qualify for the best interest rates.

In addition to reviewing your assets, income, and other factors that signal your ability to repay, lenders want proof you have a habit of honoring your debts.

That’s where your credit score comes in. If you’ve made mistakes with your credit in the past, or your credit history is fairly new, in most cases, you won’t command the lowest interest rates.

Nevertheless, you can start a plan to improve your credit score right now.

Note: Although there are several scoring models that measure your credit risk, FICO is the most popular one among lenders. For that reason, the following tips are centered around increasing your FICO score.

Step #1: Recognize How Much Bad Credit Costs You

You know bad credit is costlier than great credit. But do you know how much?

For the answer, let’s go to the FICO Loan Savings Calculator.

Excellent Credit vs Poor Credit

With poor credit, your monthly payment is $186 more than if it were in excellent shape. Over 30 years, you’ll pay an extra $67,000 in interest.

But that’s not the worst of it.

What if you invested the “poor credit premium” of $186 over the life of the loan?

Using the Future Value Calculator at DinkyTown.net, let’s see what we come up with.

Future value of extra interest you pay for having poor credit vs excellent credit

Wow! An extra $229,000 in your pocket ain’t bad – ain’t bad at all.

After eighteen years, the length of time you’re saving for your child’s college education, your monthly investments could grow to almost $81,000.

The bottom line: Your credit score is a big, frickin’ deal.

Step #2: Order a Free Copy of Your Credit Report

Go to AnnualCreditReport.com to get a free copy of your credit report. You can obtain a free credit report once every 12-month period from each f the three major credit bureaus (Experian, Equifax and TransUnion).

Step #3: Dispute Errors on Your Credit Report

To understand what types of errors hurt your credit score, you should know how the FICO scoring model works.

FICO Pie Chart

 

It’s wise to follow up with all inaccuracies recorded on your credit report – particularly those that indicate you’re a victim of identity theft – but certain information is more likely to drag down FICO score.

  • Negative information that should no longer appear on your credit report (late payments and collections more than seven years old, bankruptcies more than ten years old). Signs that you don’t pay your debts as agreed reflect negatively on your payment history.
  • Limits on lines of credit that are lower than what you’re approved for. Lower credit limits result in a higher credit utilization ratio (discussed below).
  • Unauthorized requests for credit. Not only can applications for new credit (hard inquiries), shave points off your FICO score, but new accounts shorten the length of your credit history.
  • Accounts with the wrong dates. The longer your credit history, the higher your score. As a result, you want to ensure the time since the account was opened is properly reflected in your credit report.
  • Accounts classified in the wrong category. FICO looks at how you manage different types of credit (credit cards, installment loans, mortgages, etc). So if your car loan is recorded as a line of credit, your score could be artificially low.

Don’t forget to check your credit report for missing, positive information as well.

Dispute errors with the credit bureau AND the company that’s misreporting the error.

Request another credit report to verify errors were corrected after the matter is resolved.

Step #4: Set Up Automatic Minimum Payments

Your payment history accounts for 35% of your FICO score. Therefore, it’s really important you pay bills on time. There isn’t much you can do if you don’t have the money. But if you do, it’d be a shame if your credit score took a hit because you forgot to pay a bill.

The solution to this issue is simple. Have your creditors deduct minimum payments from your checking account before the due date. You may not have this option with every creditor. In those cases, use your bank’s online bill pay function to send checks on a reoccurring basis.

Make sure the payment amount you select is large enough to cover minimums that increase as your credit balance increases.

Step #5: Pay Down Balances on Lines of Credit

Another huge factor affecting your credit score is the amount you owe. FICO looks at your credit utilization to determine whether you’re an increased credit risk. Simply put, credit utilization is the amount you owe on lines of credit compared to your total available credit.

According to Liz Pulliam Weston, MSN Money financial columnist, your credit utilization ratio shouldn’t exceed 30%. Ten percent or less is ideal. Try to use credit cards equally to spread out your credit utilization.

Your credit utilization is the exact reason you should NOT close credit card accounts. Contrary to popular belief, this move will harm your credit. Look at what happens when you cancel a credit card.

Credit Utilization Ratio Example

Lenders often report revolving account balances to the credit bureaus as of the statement date. That means, even if you pay your credit cards in full each month before the due date, your credit report still may not show a zero balance on these accounts.

If you’re in the market for a loan, you may want to consider paying your credit cards off completely. Wait until after you’ve secured the loan to start using them again. Another option is to submit a hefty payment a few days before your statement closing date to get the same results.

Have you ever used any of these methods to boost your credit score? What other tricks worked for you?

Did you enjoy this article?
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{ 15 comments… read them below or add one }

callmewhatyouwantevencheap May 23, 2012 at 8:57 AM

Great information!
My recent post Keep Calling Me Cheap!

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callmewhatyouwantevencheap May 23, 2012 at 9:00 AM

I pressed enter to soon!

Paying your bills on time, and not going over your credit limit will also lower your FICO score.
My recent post Keep Calling Me Cheap!

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Shawanda May 25, 2012 at 8:35 AM

Ha! It happens. Exceeding your credit limit will definitely hurt your score. It sends your credit utilization ratio through the roof.
My recent post 7 Things You Didn’t Know Were Free at the Library

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addvodka May 23, 2012 at 9:12 AM

Up until last year, I'd never seen my credit score. For all I knew, it had a whole bunch of black marks on it. When I got a credit report it showed me that I didn't have anything on it, but I could have been happily going through life in ignorance, so I'm glad I got it. It was free!
My recent post 6 Ways to Simplify Your Life (Without Becoming a Minimalist)

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Shawanda May 25, 2012 at 8:38 AM

Free ain't bad. I remember the days you had to pay for it. However, I was able to obtain a free copy of my first credit report after I was turned down for credit. You can still get a free credit report if you're denied credit.
My recent post 7 Things You Didn’t Know Were Free at the Library

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Frugal Portland May 23, 2012 at 10:10 AM

thanks for the reminder – I should go pull my report!
My recent post Getting out of debt is boring

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Shawanda May 25, 2012 at 8:39 AM

Yeah. I do too. :) I try to do that thing where you pull one credit report every 4 months. It's not working for me. I need to get them all at once.
My recent post 7 Things You Didn’t Know Were Free at the Library

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Anthony Thompson May 23, 2012 at 2:28 PM

Building a good credit rating is important for showing creditors that you are fiscally responsible. These are the exact steps that we all need to follow to ensure that we look great to lenders.
My recent post Self Manager – How to Bitch Slap and Prevent High Cholesterol

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Shawanda May 25, 2012 at 8:49 AM

If you're gonna borrow money, it's wise to have good credit.
My recent post 7 Things You Didn’t Know Were Free at the Library

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Lance@MoneyLife&More May 23, 2012 at 8:25 PM

If you don't ever carry a balance (you pay your CC's off in full every month) a great way to raise your score is to get your credit limit increased so you end up having a lower utilization ratio. This is ONLY good if you have no problems with debt. Do not do this if you are trying to pay off debt.
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Shawanda May 25, 2012 at 10:07 AM

Excellent point! You may even be able to get your limit increased without the card issuer performing a "hard" inquiry on your credit report.
My recent post 7 Things You Didn’t Know Were Free at the Library

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Shawanda May 25, 2012 at 10:11 AM

Excellent point! You may also be able to get your limit increased without the credit card company performing a "hard" inquiry on your credit report.
My recent post 7 Things You Didn’t Know Were Free at the Library

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orlocarver615 May 25, 2012 at 5:29 AM

You can get your credit reports free every year from each of the three credit reporting agencies ..Thanks for sharing..

Reply

Shawanda May 25, 2012 at 10:11 AM

That's pretty cool, huh?
My recent post 7 Things You Didn’t Know Were Free at the Library

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CaliGirl May 31, 2012 at 1:32 AM

Just found your blog. I love it. Keep the tips coming. Are accounts sent to collection required to be removed from your credit report? I have ignorant mistakes to clean up. Any advice is appreciated

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