From the days of our schooling all the way to our annual reviews at work, the concept of being scored can strike fear into the hearts of some of us, and create a sense of competitiveness in others. For most, it’s not exactly inspiring to know that grades are being generated on us while we go about living our daily lives.
Here’s the good news. Although you can’t use credit and avoid being scored on it, you can improve your scores if they’re not where you want them to be. And the things you’d have to do in order to improve your scores will have the bonus of being good for your finances as a whole. Here’s how you can work towards getting good credit scores:
Make Payments on Time
If you want to improve your credit scores, the one of the most important things you can do is pay your bills on time. Not just your credit bills, either. Any company you pay money to for services can report your payments behavior, from your credit card issuer to your utilities provider and more.
What’s more, any company you owe payments to can sell defaulted accounts to collections, which will majorly drag down your credit scores. Even that library fine you forgot about years ago could end up in collections and cause damage to your credit scores.
It’s okay if your past includes late and defaulted payments – they will eventually fall off your credit report and your credit scores will rebound. Just do what you can to make payments on time from this point forward, and your score will see an improvement for it.
Handle Any Accounts in Collections Immediately
Speaking of accounts in collections, if you have any floating around right now, then your credit scores are suffering because of them. The sooner you pay off collections accounts, the sooner you can start to move forward with a positive credit history and improve your scores.
Figure out what you can feasibly do about accounts in collections, such as saving up money to settle the debt or calculating how much you might be able to pay on a monthly payment plan, and then go ahead and take that next call from the debt collector. You can also call them on your own if you’re ready to negotiate.
Once you’ve got the debt collector on the line, calmly explain to them what you can do to resolve the account. It’s in their best interest to work with you, so ask for a supervisor if they refuse to negotiate on the terms you can afford. Once you have an agreement in place, ask for a copy of it in writing so you have proof.
Before you do this, however, brush up on these rules about what debt collectors can’t do so you can protect your rights.
All that said, there is something called the statute of limitations on debt, which means your debtors can’t successfully sue you for repayment after a certain amount of time has passed. Once a debt is old enough based on your state’s statute of limitations on that type of debt, it becomes “time-barred.” Keep in mind that if you’ve recently made a payment on an old debt, it might no longer be considered time-barred and a debt collector can possibly sue you for repayment. Whether or not this is true will depend on the state in which you took out the debt.
If you wish to not pay on a time-barred debt, you can choose to do so, but keep in mind that accounts can remain on your credit report for seven to 10 years, with the exact amount of time dependent on the type of debt it is.
Reduce Your Debt
Debt will affect your credit scores, but the tip to reduce your debt doesn’t mean you have to worry about how you’ll pay your mortgage off sooner. Long-term installation loans such as mortgages and student loans affect your credit, but companies know that these aren’t meant to be paid off in a short period of time.
Revolving debt such as credit cards, however, are a different story. Besides the fact that their high interest rates cost you money the longer you carry a balance, having too many high balances on them can make it look as though you’re financially overextended.
The best thing you can do is keep your credit card balances as close to zero as possible. That doesn’t mean you can’t use your credit cards, but that the best way to use them from a credit building (and money saving) perspective is to refrain from using too much of your available credit and to pay the balances in full each month.
This runs counter to some bad advice you might see out there, which is to carry a balance on your credit card to build credit. That is a credit score myth and a dangerous one at that. You only need to use credit to build credit, you do not need to carry a balance from month to month — doing so won’t help your credit and it will cost you money in interest.
As for what to do if you’re carrying high credit card balances now, it might seem impossible to pay them off. Focus on how you can strategically pay down the debt, whether it be earning extra money or cutting costs to put more towards your payments or even consolidating to a lower interest rate so you can pay them off faster. This will help you free yourself from expensive debt and improve your credit scores at the same time.
Apply for New Credit Strategically
When you’re in the market for new credit, especially a loan, it’s important to shop around for the best interest rate you can get. But if you’re applying for a new loan or credit card every month, your credit scores could take a hit.
Lenders understand that you need to rate shop, but constantly applying for new credit could again lead to the assumption that you’re financially strapped and desperate for new credit to stay afloat. That’s why it’s important to apply for new credit strategically.
If you’re looking for a new car loan, for example, keep the loan application period to a two-week window if you can. This time frame is a sort of grace period during which your credit score won’t be majorly affected by the multiple credit applications. You should also apply for the same type of loan and for the same amount to make it clear that you’re not trying to get all the loans, but looking for the best one you can get.
When you need a new credit card or loan, you don’t have to worry too much about this factor. Just keep it reasonable by selecting a top few, doing research on multiple before you apply, and then not applying for more credit on a regular basis once you’ve gotten what you need.
Keep Accounts Open
Here’s a really easy way to improve your credit scores. Keep old accounts open. You might feel the urge to purge your accounts to “clean up” your scores, but that will actually hurt your score.
The longer the history you have with financial accounts, the more trustworthy you might seem to lenders. Therefore, keep those accounts open and let their age help your credit scores. As long as you’re building a positive history through on-time payments, this is an easy win towards building better credit.
What’s more, closing a credit card account specifically will increase your credit utilization ratio (that is, the amount of credit you’re using in comparison to the amount of credit available to you). This will impact the debt amount factor of your score, of which credit utilization plays a large part. This is even more reason to keep old accounts open.
Fix Mistakes on Your Credit Reports
It’s not uncommon to find mistakes on a credit reports, which can unnecessarily drag your score down. It’s important, therefore, to review your credit reports regularly and ensure that all the information there is correct.
You can do this easily by downloading your credit reports for free once per year at AnnualCreditReport.com. There will be three, one from each credit reporting bureau (Equifax, Experian, TransUnion), and you should review all three. If you find an error on any of them, dispute the error with the credit reporting bureau whose report has the mistake.
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Know What’s in Your Scores
Curious about how these tips can help your credit, or what the details are on what lenders care about when reviewing your history? It’s easy to find out by looking at what’s in your credit scores.
Here are the factors that play into your FICO® credit scores:
|FICO® Credit Score Factor||Percentage|
|Length of credit history||15%|
And here’s what VantageScore® says you can do to improve your credit score:
The factors that calculate your score are those that can show lenders that you’re a trustworthy borrower — one that won’t take out more credit than they can reasonably repay and that will pay on time. In the end, it really is that simple, so the more you do to show that you’re that type of borrower, the better your credit scores will be.
When you think about your credit scores, avoid the overwhelm of information by remembering this: The things you can do to improve credit line up with the things you can do to build a stronger financial footing. Stay with the basics of paying bills on time and keeping debt as low as possible, and you’ll be in good shape.