Credit Score has completely taken over as the primary means by which credit decisions are made. It is an ever-more important aspect of our financial life. Many people struggle with poor or average credit scores, but it’s actually a lot easier than you might think to improve your credit score. You just need to get the information you need, and be prepared to follow through.
A higher credit score increases the opportunities for truly competitive credit offers and makes you immune from predatory lenders. As I’m sure you’re aware there is a whole market for sub-prime credit, which tends to include borrowers with credit scores below 620. In fact, the difference between good and bad credit can be as much as $5000 a year. Applying the easy steps to increase your credit score can put you in the position to earn far more competitive interest rates and put you on the path to financial independence.
Proven strategies to effectively increase your credit score:
Set up direct debit payments.
Payment history is the single most important factor in calculating your credit score. It forms 35% of the overall calculation. This is why recent late payments (reported in your file within the last 12 – 18 months) can have a devastating effect on your credit score, even if you have been paying your bills perfectly on time for decades and have excellent credit. For example, if you have credit score of 780, just one late payment could cost you 100 points.
Lenders have the right to report an account late the 1st day the bill is past due, but they typically don’t report it late to the credit reporting agency until it is 30 days past due. So, if you’re only a few days late on your credit card payment, as long as it is less than 30 days late, the late payment won’t go on your credit report if you make the payment before the 30-day mark. So if your bill is due on the 5th of the month but you are unable to pay until the 29th of the same month, you should be okay. The best way to avoid late payments is to setup an automatic payment schedule so that you never miss a payment.
Only use credit cards that report your total available credit.
In order to have high credit scores, you must have credit. Contrary to what a lot of people think, having no credit whatsoever means you’re “credit invisible”. You need at least 2 – 3 credit cards in good standing in order to build up your credit score. However, before you sign up to a credit card offer, make sure that you only use credit cards that report not just your current and highest balance, but your total available credit to the credit reporting agencies. If you already have credit cards, you can review this information in your credit report.
Keep low balances.
30% of your credit score is based on credit card balances vs available credit. This is your credit utilization. The lower the balances on your credit cards, the more points you will gain. Never use more than 20-25% of the available credit you have on any revolving credit lines at any time during the month. You can lose as much as 75 points for having maxed out revolving credit accounts, even if you pay the full balance at the end of the month.
Get a healthy mix of credit accounts.
10% of your credit score is based on type and mixture of credit accounts. This means a healthy mix of revolving credit, installment credit, finance companies, and ideally, mortgage credit. You need to have at least one of each of these accounts to get the best results. The types of lending institutions you borrow from can also be a factor. Traditional banks (Citibank, Chase, Capital One) are viewed as more favorable than certain types of sub-prime loan companies that market to people with challenged credit.
Do not close older credit accounts.
It might seem sensible to close your oldest credit accounts if you are not using them, but if you do so, your credit score will likely drop by a significant margin. As much as 15% of your credit score is the length of your credit history. Closing your older accounts will cause your credit history to appear shorter, which may harm your credit score.
The longer you can demonstrate responsible use of credit, the higher your credit scores. Your oldest cards could be worth 30, 40 points or more. If there’s no risk of identity theft to the account you might want to leave those old accounts open.
Track your FICO score every single month.
It is crucial to review your FICO credit score on a regular basis so that you can keep on top of any new developments on your credit report. This also allows you to act in time when you discover that there is a problem. One of the most effective ways to track your credit score is to use a credit monitoring service so that you know what happens during every single month.
As you look for a credit monitoring service, insist on finding one that gets you FICO scores and not FAKO scores since these could be different from your FICO score. This is because most banks and other lending institutions will often use the FICO score. FAKO has been known to give people a false sense of security because it is often higher than the FICO score. You can check your FICO credit scores for free every month on credit.com.
Keep your credit score fresh.
You can keep your credit score fresh by getting a secured loan and a savings account in the same amount every few. Put $350 in a savings account and borrow $250. The savings account pays for the loan and if you set it up on direct debit then you will never be late. Be sure to include the interest, and make sure that the financing company sends a report to the credit bureaus.
If you want to get a secured loan, I don’t go as high as $1000 or more. The amount doesn’t matter. What you want to see is regular payments made to your credit report on time. Just do $250 or $250…that way you can raise your score with payments, but not lose much in interest money.
Focus on the most recent activity in your credit report.
Anything in your account that is older than 18 months will have significantly less impact on your credit score than the most recent items. This is why it is possible for one late payment to really damage your credit score even though you may have been paying your bills perfectly on time for years.
Essentially, the credit scoring models are based on the premise that your most recent financial history is the single biggest factor in predicting your ability to make your payments on time. It is therefore more important to settle recent smaller debts than older, larger debts. This might not seem possible, but it’s true. The actual size of the debt is irrelevant, and will have the same impact in terms of proving (or disproving) your ability to make regular payments on time.
So, if you have a three year old debt on your credit report and reach an agreement with a debt collector this year, making that payment means the “Date Reported” on your credit report is also updated. The date reported is the date your account was flagged as late. This date is important because any negative account history typically remains on your credit report for a minimum of seven years after the “Date Reported”.
By law creditors are not able to update the “Date Reported” section unless you are in a repayment situation and have missed a payment. In other words if you start paying off your collection and then miss a payment, collection agencies can update the “Date Reported” – which keeps a negative status on your credit report far longer.
Restrict applications for credit to within 30 days.
Every time you make an application for credit, it is registered as a hard enquiry. If you apply for several credit cards within a short period of time, multiple inquiries will appear on your report, and this equates with higher risk. A hard inquiry can take more than 15 points off your credit score depending upon the type of hard inquiry and the time period in which the inquiry was done. Under a law enacted in 2003, all credit pulls within a 30-day period count as one pull. However, these do not apply to credit cards.
Loans that are affected involve rate-shopping for mortgage, auto and student loans. If you’re shopping for a mortgage, vehicle, or other type of loan you may want to compare rates and terms with different lenders. It is expected that a consumer will comparison shop for the best interest rate on a new house, new car, or a re-finance. FICO Scores ignore inquiries like these that are made in the 30 days prior to scoring.
This is designed to allow people to shop around for the best deals without being penalized for doing so. This is why it is best to restrict your shopping around for these types of credit within a 30-day period. On the other hand, if you’re applying for credit cards and getting constantly declined, stop applying for more credit as this is damaging your credit score. Most high credit scorers have about two hard inquiries per year; anything over six inquiries within a year can be viewed as excessive.
Remove 7-year old negative items from your credit report.
According the Fair Credit Reporting Act, any negative items that are at least seven years old must be deleted from your report. Note however that bankruptcies will remain on your credit report for ten years. If after reviewing your report you find any negative items that are more than 7 years old, send a request to the credit reporting agency that the information be deleted from your account.
If you have any trouble getting this done, contact the Consumer Financial Protection Bureau (CFPB) and file a report against the company holding your credit hostage. If the credit bureaus refuse to do so, then file the complaint against them. The CFPB will contact whoever is responsible for this personally, and they will have to respond within 2 weeks.