Improving your credit score won’t happen over night. But by being informed, having a plan in place and sticking to it you can improve your score.
1. Check your report for errors
A 2012 study done by the Federal Trade Commission found that one in five people had mistakes on their credit report. In your quest to raise your score, the first thing you need to do is request a copy of your credit report. (Requesting a copy of your own credit report does not lower your score.) Check for errors and tackle any errors immediately. Common errors include loans or outstanding debt that has been paid but not reported as paid.
2. Always pay your bills on time
Okay, okay…I know this isn’t a news flash! But do you know just how much this matters? This is the number one weighted factor that the credit bureaus use to calculate your credit score!
I once had a homebuyer who had been doing some credit repair work to qualify for a home loan who missed one $25 credit card payment several months earlier and this made the difference in her ability to get the loan.
Did you know that missed payments stay on your credit for seven years? How about this, did you know that one missed payment could drop your credit score by 100 points?
Bottom line, whatever you do, don’t miss payments! Pay on time, it’s the best thing you can do for your credit!
3. Keep your credit to debt ratio low
After paying on time, this is the second most important weighted factor that affects your credit score. Your credit to debt ratio is the amount of credit you have available to you on an account compared to the amount of debt you have. You want to keep your credit to debt ratio under 30% and to get really high marks in this area, stay under 10%.
So if you have a card with a $1000 limit, keep the balance under $300. Keep this in mind when paying down the balances on several cards. Let’s say you have a card with a $10,000 limit and you owe $2,800 on it. You have another card with $1000 limit with a $700 balance. Pay the card with the $700 balance down first in order to get that account down below that 30% mark.
Even if you pay your card off monthly, if you use your card for most purchases and the balance is regularly over 30% of your credit limit, this can effect you. If you fit this bill, make a payment on your card multiple times throughout the month.
4. Don’t ignore outstanding balances
Don’t ignore collection calls. If you owe a balance that you can’t pay, work out a payment arrangement. Ignoring an owed debt only makes it worse with added fees and interest. And eventually your original creditor will most likely send your account to a collection agency. If a creditor will not except a payment arrangement that you can afford, send them what you can afford even if you are told the amount is not sufficient. Your account will be less likely to be sent to a collection agency if you are making some sort of effort to pay your bill.
If your account is sent to a collection agency, most will negotiate settlements and/or payment arrangements on outstanding debts. Again, if the collection agency will not accept a payment arrangement you can afford, send what you can afford on a monthly basis. Again here, you are less likely to have a judgement filed against you if you are attempting to pay something towards the account.
Also, keep in mind that if you do settle an account that is in collections, your account will be marked “settled” to the credit bureaus, not “paid”. A settled account is better than an outstanding account but not as good as a paid account.
5. Don’t open a lot of new credit cards
Did you know that every time you apply for a new credit card your credit takes a hit? It’s not a big hit at about 5 points and after a year has no affect. But if you are needing to apply for a home loan and you are close to the line, every point counts.
And certainly don’t get a bunch of new credit cards at once. 10% of your score is based on new credit. Opening several new lines of credit at once can hurt your score.
6. Credit History
15% of your credit score is based on credit history. How long you have had credit accounts and been in good standing. So, if your issue is you don’t have much credit history, the best thing you can do it start now. Open a credit card or two, start charging and pay on time! If you can’t get a traditional credit card, start with a secured card or have a friend or family member apply with you.
Good credit can save you a lot of money. When applying for a mortgage, the better credit you have, the better rate you can get. Good credit will save you thousands of dollars over the years. If you are planning to buy a home in the near future, my advice to you is get a copy of your credit report now. A measly 30 points may save you $100 a month on your payment.
For more information on improving your credit score before an upcoming home purchase, contact Courtney.
Courtney Murphy is a REALTOR serving the Denver metro area.