A 12-Step Action Plan to Improve Your Credit Score

Your credit score impacts your ability to get out of debt and stay out of debt. The worse your credit score, the higher the interest rate you will be charged on money you borrow. The better your score, the less your debt will cost you and the quicker you'll be able to pay it off.

So it's not only important to know your credit scores from all three major credit rating bureaus -- Equifax, TransUnion and Experian -- but to know how to raise your score. The simple truth is that raising your credit score isn't that hard if you know what to do.

Over the years I've coached literally thousands of people on how to fix their credit scores, and based off of that experience I have developed a 12-step action plan to raise your score quickly and keep it there. Regardless of where you start from, if you follow this plan and utilize the online tools I discuss -- in six months your score will be higher than you ever thought possible.

Step 1: Get Your Credit Report and Check It for Errors

Under the Fair Credit Reporting Act, the Big Three credit bureaus are required to provide every consumer who asks with a free copy of their credit report once a year. You can get yours by going to annualcreditreport.com. This step is important because it is extremely likely that there are errors.

A study by the National Association of State Public Interest Research Groups found that one in four credit reports contain a mistake serious enough to keep you from getting a loan, credit card or in some cases a job.

Once you get your report, go through it with a fine-toothed comb. If you find any errors (for example, late payments that were actually paid on time or credit limits that are lower than they should be), get them corrected as quickly as possible. You can do this by sending the credit agency a certified letter that explains what information was inaccurate, including copies of documents (such as bank records) that verify your claim, along with a copy of your credit report with the disputed issue highlighted.

Under the Fair Credit Reporting Act, the credit-reporting agencies are required to correct inaccurate or incomplete information in your report within 30 days. Go to the "Free Stuff" tab at www.finishrich.com to access sample correction letters. Also, go to Finishrich.com and sign up right now and take advantage of the free Debt Wise 30-day trial. By signing up, you will be entitled to a free Equifax Credit Score, so you can see where you stand.

Step 2: Automate Your Bill Paying

This may be the most important tip. Missing payments or being late on payments can quickly ruin your credit score. For this reason, I strongly recommend that you use your bank's online bill-paying service to automatically transfer a pre-set amount every month from your checking account to cover at least the minimum payments on all your credit accounts. I have practically every bill of mine automated in this way. You can also use your credit card company online bill payment system to notify you through email when you are close to going over your credit limit, which can help you avoid more damage to your score.

Step 3: If You Have Missed Payments, Get Current

It's never too late to clean up your act. Get yourself current as quickly as you can and stay current. Your score will begin to improve within a few months, and the longer you keep it up, the more noticeable the increase will be. The negative weight that FICO gives to bad behavior like delinquencies lessens over time, so as long as you stay on the straight and narrow, those black marks will eventually disappear from your record for good.

Step 4: Keep Your Balance Well Below Your Credit Limit

Of all the factors you can control -- and improve quickly -- how much you owe is probably the most powerful. Since the credit crunch, credit card companies have been cutting customers' credit limits without warning. This can be devastating to your credit score. Say you've got a $1,000 balance on a card with a $2,000 limit--and then the card company slashes your limit to $1,000. Suddenly, you've gone from 50% credit utilization to being maxed out, which can shave 45 points from your credit score. The credit bureaus recommend that you keep your usage below 33% of your available credit.

Step 5: Beware the Credit Card Transfer Game

For years, people have saved money by transferring high-interest credit card balances to low-interest cards. This can still be helpful, but be aware that using one credit line to pay off another sets off credit score alarm bells -- even if all you're doing is consolidating your accounts. All other things being equal, your credit score will be higher if you have a bunch of small balances on a number of different cards, rather than a big balance on just one or two.

Step 6: If You Rack Up High Balances, Pay Your Card Bill Early

The "Amounts Owed" part of your credit score is based on the balance due listed on your most recent credit card statements. So even if you pay your bills in full each month, running up high balances can still hurt your score. Avoid this problem by paying down all or part of your bill before the end of your statement period, thus reducing the balance that will be reported to FICO and the credit bureaus.

Step 7: Hang On to Your Old Accounts

Part of your credit score is based on how long you have had credit accounts. Closing old accounts shortens your credit history and reduces your total credit -- neither of which is good for your credit score. Keep the older accounts open, even if you aren't using them.

Step 8: Use Your Old Cards

The credit card industry has gotten much stricter about closing inactive accounts. This can hurt your credit score, since it reduces the average age of your credit accounts. To prevent this from happening, you should pull out your old cards and start putting at least one charge on them every month.

Step 9: Demonstrate That You Can Be Responsible

The best way to raise your credit score is to demonstrate that you can handle credit responsibly -- which means not borrowing too much and paying back what you borrow on time. Don't open new accounts just to increase your available credit or create a better variety of credit. You should open new credit accounts only if and when you need them.

Step 10: Shop for Loans Quickly

When you apply for a loan, the lender will "run your credit" -- that is, send out an inquiry to one of the credit-rating agencies to find out how credit-worthy you are. Too many such inquiries can hurt your FICO score, since it could indicate that you're trying to borrow money from different sources. Of course, you can also generate a lot of different inquiries by shopping for the best mortgage or auto loan. The FICO scoring system is designed to allow for this by considering the length of time over which a series of inquiries is made. So, try to do all of your loan shopping within 30 days.

Step 11: Know the Difference Between a 'Soft Inquiry' and a 'Hard Inquiry'

The credit bureaus all recognize the difference between you checking your own score (a "soft inquiry") and lenders checking your score (a "hard inquiry"). While too many hard inquiries can lower your score, soft inquiries don't count at all. Feel free to check your score as often as you want.

Step 12: Buy a 3-and-1 Report, and a Credit-Monitoring Package and Identity-Theft Service

Your credit score and credit report are so important that it makes sense to pay for a 3-and-1 Report (which provides you with your credit scores from the three bureaus) as well as an identity-theft monitoring service. In most cases, these services will cost you between $14.95 and $19.95 a month -- I personally pay for these services myself because I think it's worth the investment.

Congratulations! You now know more than 95% of all Americans about what may well be the most important influence over your financial life -- your credit record and score. Make lifelong monitoring of your credit part of a debt-free lifestyle! For more resources and tools go to finishrich.com.
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