How to Improve Your Credit Score

Your credit score is one of the most valuable financial assets you own. It can determine whether you are approved for financing, and the interest rate you receive. Over the lifetime of a consumer, your credit score can cost you, or save you, a substantial amount of money. For example, the savings can run into the tens of thousands of dollars or much more when it comes to the interest rate you receive on a home loan.

While there are numerous credit repair agencies that promise to repair your credit for a fee (sometimes a very expensive fee), we believe it is important for every consumer to know how to take control of his or her own personal credit. Understanding the information in your credit report, and how it affects your credit score can help you use credit wisely, maintain good credit habits, and avoid a lifetime of excessive debt.

Your credit score is constantly changing. It is not uncommon for a credit score to drop 50 points or much more due to a single late payment. Conversely, a credit score can be increased relatively quickly as good payment habits are reestablished, or debts are paid down to improve your debt-to-available-credit ratio.

Here are seven steps you can take to help improve your credit score.

1. Pay your bills on time. Even if you pay the minimum amount due, it is important to pay your accounts on time! Your payment status plays a big role in determining your credit score. Your payment history actually accounts for 35% of your credit score.
   
   
2. Avoid using too much of your available credit! Scoring models consider lower balances to be a positive factor. When you are "maxed out," using virtually all of your available credit, your score will be adversely affected.
   
   
3. Pay down your debts! Again, the more debt you pay off, the more available credit you will have and this will reflect positively on your credit score. Lenders like to see accounts where you are at 30%-35% of your available credit, demonstrating a positive debt-to-available-credit ratio.
   
   
4. Keep your new applications for credit to a minimum. Too many new applications for credit over a short period of time will lower your credit score. This could be especially damaging to you, if this occurs at the same time you are looking to finance a new car, or taking on a new mortgage.
   
   
5. Be careful about closing your old accounts! Even if you have an old account that you've forgotten about, and not used for a long time, you should think twice before closing it. Why? Old accounts can help your credit score, because they can demonstrate how long you have used credit and scoring models factor this in to your credit score. By closing an old account, you may be negatively impacting your "length of credit history." Even if it seems like a good idea to close older, more established, accounts to consolidate your balances, you could very well be lowering your score by reducing the credit history you present to lenders. Closing old accounts can also reduce the overall amount of available credit that you present to lenders.
   
   
6. Make sure your credit reports are accurate on all three credit bureaus. Since there are three separate credit bureaus that maintain your credit files, and companies where you apply for credit often rely on separate credit bureaus, you should check your credit reports from all three credit bureaus. You can do this once per year for free for each credit bureau at www.annualcreditreport.com. However, your free annual reports do not include your credit score. For your convenience, you can also order a 3-1 Credit Report that provides a side-by-side comparison of all three of your credit reports: Equifax, TransUnion, and Experian. This report comes with credit scores for each bureau.
   
   
7. Monitor your credit reports on a regular basis. Credit reports and credit scores are changing on a regular basis as new information is filed. Not only is it important to make sure credit reports are accurate to make sure you get the credit you deserve, but monitoring your credit can also help you detect potential identity theft. Should you discover information on your credit report that you believe to be inaccurate, you have the right to dispute the information. You can do this by writing to the appropriate credit bureau at the addresses below, or you may go to the appropriate website for each bureau and file an on-line dispute form. It is important to monitor your credit reports on a regular basis because errors in your report may lead to lower credit scores.

Below is the contact information for all three major credit bureaus. For online dispute filing, links to each bureau are provided:

Equifax
P.O. Box 105873
Atlanta, GA 30348
equifax.com
(800) 685-1111

Trans Union
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
transunion.com
(800) 916-8800 or (800) 888-4213

Experian
P.O. Box 2104
Allen, TX 75013-2104
experian.com
888-397-3742

Next Lesson 6: Credit Monitoring

Reduce Financial Stress
5 strategies to help you take charge of your financial world

Part-Time Opportunity
How part-time work can save you money

Closing Old Accounts
Doing so may impact your credit score

It's Not the $3 Cup of Coffee
Key choices that provide for financial security and peace of mind

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