While there is no “best” way to improve your credit score, as each of the three main credit reporting bureaus may give a higher value to one type of action over another, there are several steps you can take, which done together, can potentially raise your score 75 points or more. These steps are not difficult, but they do take planning and perseverance. You don’t necessary have to pay off all your debt, but rather you may need to reposition some debt, while paying down higher balances on other obligations. The reward is great, and can potentially save you thousands of dollars in lower-interest rate loans and time saving qualifying requirements. Most lenders base the interest rate they offer on the FICO score derived from the results found in the borrower’s credit report. The higher the FICO score, in most all cases, the better the interest rate offered. Although determining your FICO score may seem arbitrary and complicated, there are still things you can do to improve your over-all score.
- Obtain a free copy of your credit report from www.annualcreditreport.com. You can also call them at 877-322-8228 or write at Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. If you have recently been denied credit, you have the right to request a free credit report from the bureau who reported your bad credit.
- Check and repair incorrect information. Look over the report carefully for errors or information which is outdated or not correct. Are there collections or past-due debts which have been paid off? If so, contact the creditor and ask that they send a correction to the credit reporting agencies. Are there items listed in which you perhaps were a co-signor on a credit card, for example with a parent or former spouse? Can these be removed? Are there items listed as open, yet you have closed out those accounts? Are any previous mortgages which have been paid noted as paid in full? Are there any late or delinquent payments which you can dispute? Are there any creditor items which you can write a letter of explanation to be attached to your credit report? If you failed to pay off an account and it went into collection, pay it off as soon as you can. These accounts hurt your score and remain on your report for seven years.
- Keep your balances low in relation to your credit limit. Do you have any credit cards in which the balance owing is close to the credit limit on the card? If so, try to pay down this balance. Try to limit the balance owing to no more than 40% – 50% of the credit limit.
- Make payments when due. Even if you carry roll over balances on a credit card, be sure to make that payment on or before the due date. Set up an automatic payment for at least the minimum payment. Your credit card company will send you a form to sign up for this feature. This will prevent you from ever being late on a payment. Delinquent payments, even if only a few days late can have a major negative impact on your FICO score.
- When possible, pay more than the minimum amount due. Even a payment of $20 or $20 over the minimum due will be helpful.
- Pay down any large credit balances. Paying down a balance is one of the fastest ways to improve your credit score. Can you tap into your savings to pay down or pay off a high interest or high balance card? This step can improve your credit score by up to 100 points by paying off some credit items completely and paying down the balance on others.
- When you pay off a credit card, don’t necessarily close it down but rather keep a small balance so that your positive payment history will continue to show up on your credit report. Note that closing an account doesn’t make it go away. A closed account will still show up on your credit report, and may be considered by the score.
- Prevent numerous credit report searches. A credit search can be performed on your report without your knowledge. Chose to “op-out” by contacting (www.optoutprescreen.com) and request that unauthorized persons not be allowed to access your credit report. Oftentimes repeated credit searches will lower your over-all FICO score. Your score is not affected when you check your own credit. Credit checks by prospective employers also do not count. These types of inquiries may appear on your credit report, but they are not included in your FICO score.
- Payoff or renegotiate bad credit debt. These could include such as medical collections, delinquent credit cards or past-due school fees. Work with the creditor and request a new pay-off figure which they will accept if you pay off the debt in full. If that is not possible, request a lower interest rate and realistic due date. Get any promise to remove bad credit in writing from the creditor.
- Only apply for credit cards which you absolutely need. Resist the temptation to take advantage of any offers for credit unless you are sure you need that extra credit. Opening new cards can lower your score and will result in additional credit searches showing up on your report.
Copyright © 2012 Sandy Gadow. All Rights Reserved. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.
Can you give me an example of how a better FICO score will save me money?
Lenders base their lending criteria on your FICO score. The higher the number, the easier it will be for you to obtain credit. “Preferred borrowers” with FICO scores of 720 and higher, may typically pay less in closing costs, and be allowed to provide less documentation than a borrower with a lower credit score. Certain requirements may be waived for the preferred borrower, such as prepayment penalties and required reserves or “escrows” held by the lender.
For example, on a $300,000, fixed rate mortgage, for a 30 year term (rates may vary as to current market conditions):
FICO score is:
rate may be:
For your individual loan criteria, go to www.myfico.com and select the “Loan Savings Calculator.” You will be asked to specify your loan type, the loan details, and the state in which you are applying for a mortgage. You can then choose your current FICO score range to see the potential savings you will gain from improving your score.
How To Remove Errors on your Credit Report
Contact the credit bureau in writing of your request and the reason why the error or misinformation should be removed. The information may be found on one or all three of the credit reporting bureaus. TransUnion, Equifax, or Experian. Clearly identify the item you dispute in your report. Enclose a copy of the report with the item in question circled or highlighted. State the facts and explain why you dispute the information. Request deletion or correction. Send your letter via certified mail, return receipt requested. Keep copies of your letter and any back up evidence. Further, write the creditor and explain that you are disputing the information they provided to the bureau. Be persistent. This process may take time, but you are allowed to request errors be removed. Don’t give up until the bureau or creditor complies. An improvement in your credit score will be well worth your efforts.
What makes up a credit score?
A credit score is made up of five components. Payment history (35%), balances carried (30%), credit history (15%), mix of accounts (10%), and inquiries (10%)
Trans Union uses the Emperica Score Fico range
Equifax uses the Beacon Score Fico range
Experian uses the Fair Issac or Fico Score range
70% of your FICO score is based on the time period two years back from today. Your score is figured on 7 years worth of data, but anything older than 2 years is only figured in the 30 percentile of the calculation. This is one reason why it is important to keep at least 3 lines of open good credit on all 3 reports.