Tips for Improving Your Credit Score
Your credit score is a crucial number that can open doors to affordable financing or slam them shut. For many Americans with less-than-great credit usually got that way because of challenging life events. Whether it was a medical emergency that led to mounting unpaid bills, a job loss that made it difficult to stay on top of payments, or the financial strain of a divorce – these situations can quickly spiral into delinquencies, collections accounts, and other credit-damaging derogatory marks. But a low credit score doesn’t have to be a permanent roadblock. With dedication and the right strategies, it’s possible to recover from credit setbacks and pave the way to a higher score that unlocks greater financial opportunities. In this guide, we’ll explore tips for increasing your credit score in practical, sustainable ways.
Are You Looking at the Right Credit Score?
Before diving into credit improvement strategies, it’s crucial to understand which credit score you should be monitoring. Many free credit score services provide scores that are calculated using different models than the ones lenders actually use. To get an accurate picture of your credit health, it’s best to obtain your tri-merge credit report from all three major credit bureaus: Experian, Equifax, and TransUnion.
Client Example:
Sarah, a 42-year-old accountant, had been checking her credit score through a free online service. However, when she applied for a car loan, the lender pulled her tri-merge credit report, and her score was significantly lower than she expected. Armed with the correct information, Sarah was able to identify areas for improvement and take targeted actions to raise her credit score.
Manage Your Credit Card Balances
One of the most impactful factors in determining your credit score is your credit utilization ratio, which is the amount of revolving credit you’re using compared to your total available credit. Ideally, you want to keep this ratio below 30%. Anything above 30% starts to raise a red flag with creditors because you are relying a bit too much on your credit. They assume you are struggling to pay for your expenses.
Client Example:
Mark, a 38-year-old sales manager, had accumulated credit card balances totaling $15,000 across three cards with a combined limit of $25,000 – resulting in a high credit utilization ratio of 60%. By creating a paydown plan and consistently allocating more funds towards his credit card debt, Mark was able to reduce his balances and lower his credit utilization, leading to a significant credit score increase within six months.
Maintain a Healthy Credit Mix
While focusing on credit card balances is essential, it’s also crucial to have a diverse mix of credit types. Lenders like to see a combination of revolving credit (credit cards) and installment loans (mortgages, auto loans, personal loans). This credit mix demonstrates your ability to manage different types of credit responsibly.
Client Example:
At 51, Linda had always been diligent about paying her credit cards on time, but her credit score wasn't as high as she expected. After reviewing her credit report, she realized she only had revolving credit accounts and no installment loans. Linda decided to take out a small personal loan to add an installment account to her credit mix, which helped boost her score over time.
Negative Marks: Addressing Collections, Charge-Offs, and Late Payments
Late payments, collections accounts, and charge-offs can significantly damage your credit score. Here are some strategies to address these negative marks:
Late Payments
A single late payment can remain on your credit report for up to seven years, so it's essential to get back on track as soon as possible. If you've missed a payment due to unforeseen circumstances, contact your creditor immediately and explain your situation. Many creditors may be willing to remove the late payment from your report if you can bring the account current. Some may not be as willing and need a firmer approach.
Charge-Offs
A charge-off occurs when a creditor writes off your unpaid debt as a loss. While this negative mark can significantly impact your credit score, you can still work to have it removed or updated. Contact the original creditor and try to negotiate a settlement agreement where they agree to update the charge-off status once you've paid the agreed-upon amount.
Collections Accounts
If you have outstanding debts that have been sent to collections, you have a few options. First, you can try to negotiate with the collection agency to have the account removed from your credit report in exchange for paying the debt in full. Another option is to dispute the debt if you believe it's inaccurate or has already been paid.
Client Example:
At 47, John had a collections account from an old medical bill that he had forgotten about. After negotiating with the collections agency and paying the $500 balance, they agreed to remove the negative mark from his credit report, resulting in an immediate credit score increase.
Dealing with Fraudulent Accounts
If you discover fraudulent accounts on your credit report, it's essential to act quickly. Dispute these accounts with the credit bureaus and provide any necessary documentation to prove the fraud. Once the fraudulent accounts are removed, your credit score should improve.
Client Example:
When Samantha, 54, reviewed her credit report, she noticed two credit card accounts she had never opened. After filing disputes with the credit bureaus and providing a police report for identity theft, the fraudulent accounts were removed from her credit report within 30 days, and her score rebounded.
Become an Authorized User
One strategy that can help improve your credit score, particularly if you’re new to credit or recovering from past mistakes, is becoming an authorized user on someone else’s credit card account. When you’re added as an authorized user, that account’s history becomes part of your own credit report. If the primary account holder has a long history of on-time payments and low credit utilization, their positive credit behavior can give your score a boost.
Client Example:
37-year-old Greg had a limited credit history after graduating college. His sister, who had several credit cards with flawless payment records, added him as an authorized user on two of her accounts. Within a few months, Greg's credit score increased significantly due to the positive account history being factored into his report. However, it's important to be strategic about whose account you get added to. Any missed payments or high balances could potentially harm rather than help your credit situation.
Consider Credit Builder Loans
Credit builder loans, which are offered by certain banks, credit unions, and online lenders, are designed specifically to help individuals establish or rebuild their credit history. With these loans, the lender deposits a small amount of money into a locked savings account or CD, and you make fixed payments over a set term, usually 6-24 months. Each on-time payment is reported to the major credit bureaus, allowing you to build a positive payment history.
Client Example:
At age 42, Maria had no credit history after living overseas for several years. She opened a 12-month credit builder loan with her local credit union for $500. By making her $41 monthly payments reliably, Maria built enough credit history to qualify for a traditional credit card once the loan term ended. While credit builder loans require you to pay interest on money you can't access until the loan is repaid, they provide a low-risk way to start developing your credit profile.
Protect Yourself from Identity Theft
Identity theft can wreak havoc on your credit score if fraudsters open accounts in your name. To safeguard your credit, it’s crucial to implement protective measures. Regularly monitor your credit reports from all three bureaus to catch any suspicious activity early. You can also place a free credit freeze on your reports, preventing new accounts from being opened unless you temporarily lift the freeze.
Client Example:
When 49-year-old Jim noticed unfamiliar accounts on his credit report, he immediately contacted the credit bureaus to dispute the fraudulent information and file an identity theft report. His proactive steps minimized the damage to his credit score. Be cautious about sharing personal or financial details online or over the phone. Utilize strong passwords and enable two-factor authentication whenever possible to secure your accounts.
The Importance of Credit Report Errors
Even a small error on your credit report, such as an incorrect credit limit or a payment incorrectly marked as late, can negatively impact your credit score. That’s why it’s essential to review your reports from all three major credit bureaus at least once per year. If you find any inaccuracies, no matter how minor they may seem, file official disputes with the appropriate credit bureau(s) to get the errors corrected.
Client Example:
Sandra, 51, was struggling to qualify for a mortgage due to her credit score being lower than expected. Upon carefully reviewing her reports, she noticed one credit card account was showing a $500 balance, when in fact, she had paid it off months ago. Sandra filed a dispute, got the error fixed, and saw her credit score increase within the next credit cycle.
Should You Consider Professional Credit Repair Services?
While it’s possible to repair your credit on your own, the process can be time-consuming and overwhelming, especially if you’re dealing with multiple negative marks. Professional credit repair companies can handle the disputes and negotiations on your behalf, potentially expediting the process.
However, it’s crucial to exercise caution when selecting a credit repair service. Research reputable companies with positive customer reviews and transparent pricing structures. Avoid any companies that make unrealistic promises or engage in unethical practices.