Your FICO credit score is one of the most important numbers you should be aware of. Your score influences how lenders, creditors and yes, even insurance companies, view you. If your score is low or if you are just beginning to build your credit, there are things you can do to improve it. Just remember, credit scores don’t go from bad to good overnight. Building good credit takes time, responsibility and a bit of know-how.
Over the years, I have helped many people improve their credit. People who thought that aspirations such as new car loans and mortgages were unattainable found they could turn their lives, and credit histories, around and become property owners. If you are trying to raise your credit score, I have a few tips that may help.
Tip 1: Pay Your Bills on Time
I know it’s pretty obvious, but this is the single most important thing you can do. Your payment history accounts for 30% of your credit score, and that’s huge. If you skip bill payments or pay them late, you will only undo any of the good things you have done for your credit score.
Paying your bills on time, every time, has more advantages than just positively affecting your credit score. It can prevent you from paying avoidable fees and higher interest rates. Most credit card companies will charge fees and raise your interest rate because of late payments. And believe it or not, some will even raise your interest rates based on your payment history with other creditors.
On-time mortgage payments are also important, even though most lenders offer a grace period. If you are late with your payment but remain within the grace period, you will not be assessed a late fee or suffer a hit to your credit. However, this grace period is not given to you by the credit angels.
It still comes at a price because you are paying interest on your balance. With a loan as large as a mortgage, this extra interest can really add up over the few days that you are late with your payment.
Tip 2: Avoid Unnecessary Credit Inquiries
Every time you apply for credit, you allow your potential creditor to pull and look at a copy of your credit report. Unfortunately, these credit inquiries negatively impact your credit score and they stay on your credit report for two years. As time passes, they have less and less of a negative impact.
The more credit cards you apply for, the lower your credit score will become. Therefore, while it may seem like a great deal to sign up for a merchant’s credit card to save 10% on your purchase, it may not be a good idea if you are actively working to increase your credit score. You are better off doing all your various store purchases with a single credit card that offers cash back benefits.
Tip 3: Keep Your Old and Paid Off Accounts Open
If you have had problems with late payments on one of your credit card accounts, you may think that closing that account once it is paid off will help your credit score. This is not the case. In fact, it can make things worse.
For starters, closing the account does not eliminate your delinquent payment history from your credit report. Furthermore, the length of your credit history accounts for 15% of your credit score. By closing an account that you have had open for a while, you may end up shortening your credit history and adversely affecting your credit score. Don’t worry. As time goes on, your late payments will have a decreased influence on your creditworthiness.
And there is another reason to keep those old accounts open. It has to do with your debt to credit ratio, which brings us to my next tip.
Tip 4: Keep Your Balances on Credit Accounts Below 40% of Your Available Credit
When calculating your credit score, the dollar amount of how much you owe matters much less than how much you owe as a percentage of your available credit. This is what is known as your debt to credit ratio.
Therefore, someone who owes $5,000 on their various revolving credit accounts (i.e., credit cards, store cards and lines of credit) but has $50,000 of available credit will look more appealing to creditors than someone who owes $500 but has only $1,000 of available credit. In the first case, the subject owes 10% of their available credit; the second person owes 50% of their available credit.
The lower your debt as a percentage of your available credit, the higher your credit score will be. This is why keeping your old credit cards open is a good idea. Just make sure that they are accounts that do not charge you an annual fee.
Tip 5: Review Your Credit Report Regularly and Dispute Incorrect Information
There are three different credit reporting agencies and you are entitled to receive a free annual report from each of them. One good idea is to stagger them so that you are receiving one free credit report every 4 months instead of getting them all at once.
When you get your report, review it carefully. If you see any inaccurate information, file a dispute. The disputed information must be investigated by the credit bureau in a timely manner. Keep in mind, though, that disputes often take a while to be checked on, and they do not always end up in your favor. However, it is worth making the attempt if you honestly believe that something on your report is erroneous.
Tip 6: Add a Fraud Protection or Explanation Statement to Your Credit Report
Let me start by saying that this action will not actually influence your credit score in any way, but if you have a less than stellar history, it may give you an edge when you are applying for credit, such as a car loan or a mortgage. It is worth knowing about this option.
Most people are not aware that you can add a 100-word statement to your credit report. You can use this to safeguard yourself from identity theft or to include an explanation for a bad period in your payment history.
For example, if you have concerns about potential identity theft, you can add “Do not extend credit to anyone using my name and social security number without first obtaining a government issued photo ID and calling me on my personal phone for verification. I can be reached at 123-555-1234.”
If there was a period in your past when you had a lot of late payments, you can add something like “Late payments between June 2009 and July 2010 were because of excessive medical bills and lost income after suffering major injuries after a fall.”
As I said, this will not alter your credit score in any way, but it might afford you some protection or make you appear more agreeable to lenders.
Enjoy the Benefits of Your Improved Credit
With improved credit, you are more likely to be approved for loans, you can benefit from reduced interest rates and, in many cases, you can even lower your insurance premiums! All but a few states permit insurance companies to take your credit score into account when assessing your rates. Statistically speaking, people with higher credit scores present less of a risk and therefore pay lower premiums.
Once you have raised your credit score, be sure to contact your local agent to see if you qualify for lower insurance rates. It may also be a good time to reassess your coverage needs and compare competitors’ rates. You might be able to save more than you think. Best wishes as you work toward improving your credit score.