Improving Your Credit Score, Continuing Personal Financial Principles
This came from Christian Personal Finance, but is in my theme of taking control of your personal finances and helping yourself to use your money wisely and understand successful financial principles. These days you need to take control of your economic situation and not rely on the government to take care of you as they will take your money in taxes at any chance they can.
If your credit score has fallen recently, due to a missed payment or two, or perhaps you have too much credit outstanding, there are some simple ways you can improve on your credit score that will get it back on the right track. Doing a combination of several of these could see your credit score rise significantly in just the next few months – and that goes for your credit score at each credit repository.
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1. Pay your bills on time from now on.
This may sound beyond obvious, but if you have any late payments in the past year or two, they’re having a disproportionately negative impact on your credit score. You can’t fix this overnight, but the best strategy going forward is to make sure that it doesn’t happen again.
One of the more fortunate aspects of credit scores is that the older negative information gets, the less impact it has. This is why it is so critical that you put any negative credit situations into your past as soon as possible. If you have a late payment that you made three months ago, you may not be able to do anything about that now, but if you make your payments on time for the next nine months, you’ll put that late payment one year into your past. By then, your credit scores should once again begin to rise. But this will happen only if there are no delinquencies in the future.
2. Take a time out on credit.
The credit scoring models favor older, established debt. Conversely, they take a dimmer view of new debt. For this reason, if you’re looking to improve your credit scores, it will help to avoid applying for and accepting new loans. This will be even more important if you have taken a new loan or two in the very recent past.
This will help your credit scores on two fronts. First, any time you apply for credit, your credit report will show a credit inquiry. While credit inquiries do not have a big impact on your credit score, the one they have is definitely negative. If you apply for credit with several lenders over a space of one or two months, the combined impact could be more significant. By not applying for new credit, you will not be adding new inquiries to your credit report.
The second of course is that any time you take a new loan, you receive a negative hit on your credit reports because of the lack of payment experience. You’ll avoid this hit by not taking any new loans.
3. Pay off small balance accounts.
Another factor the credit scoring models consider is the number of loans you have outstanding. In general, a person with three outstanding loans will have a better credit score that someone who has ten outstanding loans.
For this reason, you might want to pay off some of your loans starting with the smallest. If you have seven loans outstanding, and you can pay off three of them with combined balances of $1,000, you will have reduced the number of loans with outstanding balances down to four.
While this may not cause your credit scores to rise by a hundred points, it could cause a smaller increase but one that will happen pretty quickly. This is one of the best ways to get upside action on your credit scores in short order.
4. Pay down a few debts.
This one is big time, and is usually referred to as credit utilization. The credit repositories measure the percentage of outstanding debt against your amount of available credit. If you have $15,000 in outstanding balances on open credit lines of $20,000, your credit utilization is 75% (or $15,000 divided by $20,000).
For comparison sake, credit repositories generally consider a credit utilization of 80% or greater to be a negative. Less than 80% is considered a positive. It is of course a matter of degree; the lower the credit utilization, the more positive the impact on your credit scores. The higher the credit utilization, the greater the negative impact will be.
Credit utilization is considered one of the best predictors of debtor default. This is why it carries such a heavy impact on your credit scores. And even if your credit scores are good despite a high credit utilization, a lender may still make a decision not to extend a loan to you.
In order to improve on this critical metric it is important that you pay your loans down to a level in which they will be at least below 80% of available credit. You should try to get each loan account down below this percentage, as well as for the combination of all of your loan accounts. This is another strategy that can improve your credit scores pretty quickly – by lowering your credit utilization, you lower your risk of default according to the credit scoring models.
5. Check your credit report for errors.
You should review your credit report at least annually to look for errors. Many contain errors that have a negative impact on your credit scores. For example, you could have loan accounts included in your credit report that are not yours. This will increase the amount of debt that you’re carrying, and lower your credit scores.
Worse is if you have derogatory credit that is either not yours, or is reported in error. Unfortunately, when you have derogatory credit, the responsibility to clear it up rests completely upon you – even if the entry is in error. You’ll have to contact the creditor to ask them to correct the information reported. Usually, in order to do that, you’ll have to present some sort of tangible evidence that what the creditor reported was in fact an error. If you don’t have this evidence, the creditor will probably not remove the information.
Once any errors are corrected, you’ll have to specifically request that the creditor remove the derogatory information from your credit report. You should also obtain written confirmation that the entry was an error from the creditor. Just in case the creditor doesn’t get around to reporting the corrected information to the credit repositories, you will then have written evidence to do it yourself.
6. Pay off any collections, charge-offs or other past due amounts.
If you have any outstanding obligations – even if they’re well in the past – they will still be having a negative affect on your credit scores as long as they are showing up in your credit report. Make arrangements to pay them off, and make sure that you get a letter of confirmation from the creditor. The creditor should report this information to the credit repositories, but once again, if they don’t you will have to do it yourself.
Never assume that outstanding balances don’t matter because they’re five or six years old. Paying them off is another way to provide a quick lift to your credit scores, especially if you’re paying off more than one.
Take as many of these steps as you can, and you should be able improve all of your credit scores in just a few months, if not sooner.