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.
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.
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.
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.
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?