11 Simple Ways You Can Boost Your Credit Score
Here are 11 steps you can take -- and they may take a few months -- to repair any damage you've done.
1. Get Going
The first thing is to review your credit report for accuracy. Mistakes can and do happen. Sometimes the information given to the credit agencies is simply wrong, and they don't fact-check unless you request it. Sometimes you're a victim of misidentification; perhaps someone with the same name fell behind on payments, and it ends up on your record. Each of the three credit agencies is obligated to provide you with a free report once a year. It's best to cycle through them every four months so you can regularly monitor the accuracy of the information.
If you find an error on your credit report, immediately file a free dispute form with the credit agency. It is then required by federal law to attempt to validate the information by checking with the creditor who reported it in the first place. That creditor has 30 days to respond, and if it cannot do so, the matter should be resolved in your favor. And while you can remove wrong items from your credit report, don't expect to game the system and erase mistakes that you really did make.
3. Be Responsible
This one is a no-brainer, but it may be the most important thing you can do: pay your bills on time. Greg McBride, chief financial analyst at Bankrate.com, calls it "the low-hanging fruit." Paying your bills on time and demonstrating responsible debt management over time accounts for two-thirds of your credit score. "If you're not doing that, it doesn't matter what else you do," said McBride. If you can't do that, at least make the minimum payment and preferably pay as much as you can. Missing a payment is a real black mark.
4. Avoid Deadly Sins
Some mistakes will ding your credit score -- but others will demolish it. Bankruptcies, defaults on a mortgage, some unpaid tax liens and defaults on student loans stay on your record for 10 years or longer. Most other mistakes get erased in seven years, and they tend to fade in importance over time. McBride says "the passage of time works to your benefit. Recent events count more and carry more weight than the missteps" you made in years past. He adds that "a credit rating is like a reputation: it takes a long to build, but it's easy to destroy."
5. Manage Credit Cards
If you are doing everything else right, think about card management. "Don't focus on the number of cards you have," says John Ulzheimer, credit expert at CreditSesame.com. "Focus on how you manage them." Your credit score is partly determined by what's known as the utilization rate. That's determined by dividing your outstanding balance by your credit limit. Ideally if you can keep that below 10 percent, it can boost your credit score, but letting it rise above 30 percent can work against you. Above all, don't max out on any cards. That is, don't spend 90 percent or more of your credit limit. Lenders tend to view this as irresponsible spending.
6. Get More Than One
Lenders like to see two or more cards on your credit report. It shows that you are able to manage your spending responsibly. Ulzheimer says having multiple cards is like having credit score insurance because it can help to lower your utilization ratio -- but only if you're still able to pay them off in full each month. However, "if you use credit cards as a supplement to your income," he says "then you're not doing yourself any favors." If you have cards that you're no longer using, don't cancel them; just shred them. Closing an account reduces your utilization rate.
7. Ignore Store Come-Ons
Chain stores lure you on with discounts (like 20 percent off your first purchase) if you apply for their store credit cards. Don't do it. It temporarily lowers your credit score each time you apply to open a new account. However, you're not punished for shopping around for a mortgage or car loan. McBride says the credit agencies assume that you're buying one home or one car if you submit more than one application within a 30-day period.
8. Ask, and You Shall Receive
If your account is in good standing for at least six consecutive months, you can usually request a hike of $500 to $1,000 in your credit limit. This is a good way for young people who are starting to establish a credit history by improving their utilization ratio. Again, this comes with a warning: it only helps if you don't use the extra credit as a signal to spend more -- but it's there if you really need it.
9. Do the Math
If your credit score is above 750, you're considered an elite borrower and usually eligible for a lender's best deal. But if your score is in the 600s, you may get the loan, but pay through the nose. Here's the difference: on a five-year car loan, a elite borrower might get a 0 percent deal, while the lower-rated borrower could pay as much as 18 percent. The difference adds up to thousands of dollars saved or lost. On credit cards, people with solid credit scores usually pay about 16 percent, while those with poor credit scores can be saddled with onerous annual percentage rates in the high 20s. There's a colossal difference in how much you'll pay in the long term.
10. Establish Credit
Young people are often in a Catch-22 situation: you need a credit history to get a lender to extend you credit. But there are some things you can do. The first option is to become an authorized user on the credit card of your parents or a really, really good friend. This establishes a baseline credit history that will help when you apply for your own credit card. The credit card company holds the other person (parent or friend) responsible for the payment. If you mess this up by charging too much, it can hurt their' score. On the other hand, if you're responsible, you get the benefit of their good credit history. Another option is to get a secured card. You deposit as little as $300 with a bank that issues a card that has that much money available to spend. You can "refill" the card, and once you've established that you can handle your money, you can apply for a real credit card.
If you're planning a big purchase -- a home or a car, for example -- work on these points three to six months ahead. "Every basis point of interest that you pay is real money," said Ulzheimer, suggesting that you also go on a credit hiatus by paying down cards as much as possible and avoiding any new debt.