Improving your Credit

These days, having a good credit rating is essential.  You need credit to make major purchases like a home or car, to qualify for utilities, and to even get a job.  The better your credit rating is, the easier it is to get qualified for loans and to get good financing rates.  Since your credit has such a significant impact on your life, it is nice to know there are things you can do to improve your credit rating.  With just a little time and effort, you can determine what may be negatively affecting your credit rating and take action to correct it. 

Your credit rating is based on the combination of the scores from all three credit bureaus (Equifax, Experian, and Transition).  The credit bureaus all use different calculations to come up with their score, but they all consider the same variables: the type of debt you have, the age of your debt accounts, the balances on your debts, comparison of your balance to the account limit, payment history of your credit accounts, and how often you apply for credit.  By being aware what variables affect your credit score, you have more control and have the opportunity to make changes to improve your overall credit rating.

Obtain a Copy of Your Credit Report

The first place to start is to get copies of all three credit reports.   You want to get all three, because not all creditors report to all three bureaus and they can contain different information.   Americans are entitled to get a free credit report from all three bureaus once a year.  You can contact each bureau directly and request a copy, or you can request them online, on websites such as 

Review The Information Contained In the Reports

Credit reports are broken into several sections, review each one carefully for errors.   Removing errors from your credit report is easy, and can have an immediate effect on your credit rating.  The sections in particular you want to look at are Public Records, Account History, and Inquiries.   Make sure there are no collections or judgments showing in the Public Records section that have been paid.   Review your account history, make sure the information reported about your open date, opening balance, current balance, limit, and payment history is correct.  Take a look at the inquiries section making sure the credit inquiries listed are yours are were authorized. 

Dispute Any Errors Found In The Reports

All three credit bureaus have online dispute forms.  You can file a dispute with each credit bureau for any information you feel is incorrect.  The credit bureau will then contact the creditors and verify whether the information is accurate.  If the creditor is unable to verify the information is accurate or does not respond, the credit bureau will remove it from your report. 

If there are errors concerning paid judgments, you may need to contact that court and correct it through them.  Many times, the court credits your account and the judgment is dismissed, but they don’t take the extra step to let the credit bureaus know the balance has been paid.  You may need to go to the court and request them to send an update to the credit bureaus.  Be sure to bring documentation with you to the court to show the judgment was paid in full.

Determine What Information Is Negatively Affecting Your Credit Score

Unpaid collections, judgments, and past due accounts significantly harm your credit rating, so it is important to address them as soon as possible.  To make a difference to your credit rating, you will need to develop a plan to pay these items off.  I recommend establishing a savings account just for the purpose of saving funds to pay off these balances.  Put a little money in each time you get paid.  Once you have enough money to pay off the smallest balance, pay it off.  It may not make too much of an impact to your credit rating since it the smallest balance, but it is motivating to know at least your efforts are paying off and one of the items is paid and gone.  Another option, if you own a home or car, is to use your equity in those items to pay off and close the accounts.

The types of debt you carry can also affect your credit rating.   You should carry a mix of credit accounts, not just a bunch of the same type of credit.  For example, having a home loan, car loan, and one credit card is much better than just having three credit cards.   It is especially harmful to have an excessive amount of credit cards.  They are seen as riskier accounts to have because there is no collateral should you default on the payments.   If you have a bunch of department store credit cards, close all but one or two. 

Another consideration with credit card accounts is the comparison of your balance to your limit. Experts recommend carrying a balance no more than 40% of the limit of your card.    If you carry more than 40% of the credit limit, either pay it off or transfer some of the balance to another card. 

Another problem area for some credit reports is the credit inquiries section.   The scoring calculation allows you a few inquiries so you can look into refinancing debts for better rates or to purchase a home or car without harming your credit.    However, applying for credit too often can negatively affect your rating.  Try not to apply for credit unless you have to.

Future Actions

Going forward, make a diligent effort to pay each and every credit account on time.  It will take some time before it significantly affects your credit rating because the bureaus track payment histories for the past two years.  The good news is the farther back a late payment is in the history, the less weight it has on your credit rating.

Evaluate Your Spending Habits

If you are going to go through the effort of trying to improve your credit rating, you might as well take a look at the way you use credit.   If you use cash instead of credit for your purchases, there is no risk of missing a payment.  You also do not have to pay anything back in the future.  To resist the temptation of using credit cards, cut them up or simply do not take them with you when you go shopping.   Try to purchase items with cash only.  That way you are only purchasing what you can afford.  If you have to charge it, you probably cannot really afford it.  Instead of charging the purchase, you can save up your money and buy it later, or wait for the item to go on sale.

Luckily with a little time and patience, anybody can improve their credit rating.  It is definitely a task worth doing, as you have so many more advantages if your credit rating is good.  Having a good credit rating can make it easier to qualify for loans, help you secure lower financing rates, saving you money, and may even help you land that job.