5 Easy steps to improve your credit score
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It's about that time. You have finally taken a look at your credit report and you cannot believe how low your credit score ranks.
Maybe it is because you missed a few payments last month. Maybe it is because when you were in college, you didn't take proper responsibilities when it came to your personal finance. What ever the reason may be, it is not over. There are still a few steps that you can take in order increase your credit score.
For those of you who have yet to be initiated, your credit score is a 3 digit number that creditors use to determine your creditworthiness. Employers, insurers and landlords sometime use this number to evaluate applicants. This number ranges from 300 to 850. A small percentage of the population, 11% to be exact, have a credit score above 800. 29% of the population have a score between 750-799.
With a score over 700, you can generally see the difference in interest rates when applying for credit. A whopping 30 million Americans have a credit score of 620 or lower. A score that low will get you higher interest rates and the term "bad credit".
Before you apply the 5 easy steps to improving your credit score, you must first get a copy of your credit report. You can obtain a copy of your credit report by visiting the Credit Report section of this site. Once you have obtained a copy, peruse it for incorrect information. If you find incorrect information, make sure you contact the credit bureaus to correct the discrepancies.
1. Pay your bills on time
I cannot stress the importance of this rule. Payment history is the largest contributor to your credit score. 35 % of your credit score is determined by your payment history.
If you are going to be late for a payment, do not let it go late for more than 1 payment period. Most creditors will charge you a late fee if one payment is missed, and not report the late payment to the credit reporting agencies. If 2 payments are missed in a row, expect it to show on your credit report.
Tip: A good way to not forget about paying your bills on time is to set up some type of automatic bill payment. A lot creditors offer this option. If it isn't an option, many banks have the option for recurring online bill payments.
2. Reduce your debt and spend less
Reducing the amount of money you owe means that you are able to pay your bills and that you are financially responsible. When creditors see low balances on your credit cards, they know that you are trustworthy and they know that they can expect a payment from you when it's due. By spending less, you will be able to maintain a low balance on your credit cards.
Tip: If you plan to apply for a car loan, mortgage, or major credit account in the coming year, start paying down your balances now. If you are one of those people who charge in order to gain rewards, put that habit away for a while. The low interest rate you will receive from your higher credit score will be a boon compared to any reward.
3. Do not close old, paid-off accounts
Closing your old accounts is not going to help you one bit. In fact, it might even lower your score because it makes your balances appear larger when your credit score is calculated. Closing your oldest accounts can shorten your credit report and make you appear less credit-worthy.
Tip: Since opening to many credit accounts and closing your old accounts can be detrimental to your credit, apply for credit when it is absolutely necessary. Think hard the next time that store clerk offers you a 10% discount if you get a store card.
4. Credit counseling is good
Do not be afraid to set up a debt repayment plan with credit counseling agencies. Contrary to what has been said in the past, signing up for debt repayment through a credit counseling agency will not decrease your credit score. In the past it used to, but today, people who sign up for these plans are no more likely to default or go bankrupt.
Tip: Don't confuse credit counseling agencies with debt settlement firms. Debt settlement firms will actually lower your since you are paying less than what you owe. Be very careful.
5. Do not file for bankruptcy
Stay away from a bankruptcy. This is the absolute worse thing that you can do to your credit. It is worse and paying late and collections. Bankruptcy can knock 200 or more points from your credit score if you had good credit. If your credit was filled with delinquencies and other negatives factors, your score will drop, but not by so many points because you were already low. Bankruptcy pushes your score below 620. Once your score is below 620, credit becomes harder to obtain and interest rates sky rocket.
High interest lenders love bankruptcies because they know that once you have filled, you cannot file again for six years. The main stream lenders will generally reject applicants with a bankruptcy on their records, which on average lasts 10 years.
Posted by jonathan on March 07, 2005 at 11:23 PM