How To Improve Your Credit Score
Improving your credit score can open up a whole range of opportunities, including better deals on home loans and other financing. Here's how to do it.
Home ownership or apartment rental is almost within your reach. You have income. You know you can make the payments. You're ready to settle down. The only thing standing in your way is your credit score. You want to improve it, you need to improve it and with the motivation of owning your own home or renting your own apartment on the line, you know you can do it.
A credit score is an unbiased report of creditworthiness. Because this number is considered to be an accurate assessment of an individual's ability to manage all kinds of credit, any bank or institution that is considering loaning money for a mortgage will pay attention to this number. A high score means a low risk borrower who will most likely be able to get a mortgage with the best terms and interest rates. A low score means an individual is high risk, and lending agencies will want to protect themselves from loss by refusing the loan or by charging high interest rates.
Improving a credit score significantly takes at least a year of disciplined, focused hard work. Let's get started.
Understanding Your Score
A credit score is a "cold-hard-facts" number, usually calculated by the three major credit bureaus (Equifax, TransUnion, and Experian), who evaluate reports from banks and other institutions. Using formulas and past payment records, they assign a numerical value that indicates how likely a borrower is to pay off future credit on time. They base their number on how the applicant has handled credit over the past seven to ten years.
The score is based on five factors. Understanding these factors can help anticipate what actions are necessary.
- What percentage of payments were made on time?
Account balances in proportion to credit limits
- Is the individual's credit maxed out? Are they under 30% of their limit? Credit bureaus calculate what percentage of the overall limit is currently being used.
Length of time
- How long an individual has held an account with a credit card institution is another factor. Bureaus like to see several cards kept active for a number of years.
Types of credit
- Credit cards, a car payment, and other borrowing are common. Having a history of consistent payment on these different types of loans can help increase a score.
Number of inquiries
- Each time an individual attempts to establish credit either for a credit card or for a long-term loan, the lending agency checks their credit score. Too many inquiries can suggest that the applicant hasn't been able to secure and that they keep trying with different agencies.
Tips for Improvement
Check your credit score
- By federal law, each of the three major bureaus must issue one annual report to you free of charge upon request. An individual can stagger their requests in order to keep track of their score for free over the course of the year. Visit Annual Credit Report by clicking here
Additionally, a relative newcomer, whose commercials you've probably seen, Credit Karma
, believes you should have constant free access. They provide this service to their members.
- If you find an error on your report, you may dispute it. The dispute is filed with the agency that has the error. For instance, if you find an error on your TransUnion report, you can send a dispute form along with your documentation proofs directly to TransUnion. The bureaus must investigate within 30 days. If you win your case, you will be issued a new, corrected report free of charge. Step-by-step instructions and samples are available through the FTC which you can view here
Avoid derogatory remarks
- Foreclosures, bankruptcies, collections, and liens stay on your record for seven years. Securing a mortgage with derogatory remarks on your record can be difficult and costly.
- Pay down your debt. You may need to secure additional income or slash spending, but you cannot allow debt to continue, to increase, or to be rolled over to another account.
Improve percentage of on-time payments
- Pay everything on time. This one factor plays heavily into your score. You cannot improve your credit score without making consistent on-time payments.
Ask lenders to increase credit limits
- Once you are on track and paying down debt, you can ask your creditors to increase your limit. By increasing your credit limit while paying down debt, you improve your balance to credit limit ratio. Avoid this tip if there is any possibility you will then use the additional credit limit to increase debt.
- Avoid putting additional charges on your credit card. Cut back on non-essentials. Remember that the goal is home ownership.
Open new accounts cautiously
- New accounts can hurt your length of time score. If you are turned down, your number of inquiries will escalate and have unfavorable repercussions. However, over time, opening a new account might be a good move if you do not have sufficient lines of credit with sufficient history.
Lower debt to income ratio
- While not listed as one of the big five factors, your debt to income ratio is a good indicator of your ability to borrow responsibly. Increasing income and/or lowering debt will improve your ratio.
Do not close out credit cards you have paid off
- Paid off credit cards that are still active help your overall score by raising your limit and adding to your length of history for a card.
Consult a debt relief expert
- If you have accumulated a high level of debt that you are unable to pay off, consider debt counseling and debt relief. Programs are widely available. You will want to enroll in a reputable program such as Project Debt Relief
Improving a credit score takes time. Be patient. Make yourself accountable to a friend or to an advisor who will keep you on track. Your discipline and good decisions will become evident within a few months and you can watch your credit score creep up to a level that positions you as a low-risk, high-score borrower.