Somewhere along the line, debt became “normal.” In fact, American consumer society has progressed to the point that access to debt is almost essential to living a middle-class life.
If owning a house is the modern American dream, most Americans wouldn’t be able to achieve this dream without the help of the finance industry. As a result, our finances — and our lifestyles — rely heavily on credit scores. Improving these scores not only opens the door to opportunities, but can also save us a lot of money in the end.
Why It Matters
A credit score determines the types of interest rates we receive on loans. Because of this, a good credit score could save tens to hundreds of thousands of dollars throughout someone’s life.
It is also required if we want great financial products like cash back rewards credit cards. These are excellent ways to earn money on the things we buy anyway and, if handled responsibly, will never cost us a penny in interest. However, you need good credit in order to access them.
Sure, it’s possible to live without ever using a financial service that requires a good credit score. A full cash-based life is not entirely out of the question. For most, though, it is simply unrealistic.
Because so many people need a good credit score to maintain the best financial condition, choices and actions that increase that credit score are incredibly important. Luckily, it’s not all that “hard” to do… it simply takes time and a concerted effort.
Let’s talk about a few of the first steps you should take when attempting to rebuild or improve your credit score.
Look for Mistakes
The fastest (and often, biggest) fix for improving your credit score is something most consumers have never done: simply correcting errors.
Credit scores are driven by credit reports, and credit reports are driven by the information that lenders and card issuers send them. More often than one might expect, lenders have incorrect information. Credit bureaus make mistakes, as well.
There is little excuse for not checking all three credit reports at least once a year. In fact, you’re entitled to one from each bureau — Experian, Equifax, and Transunion — every twelve months, free of charge. Be sure to obtain these and pick through them, paying attention to high balances, late payment marks, and other derogatory reports. If something doesn’t seem correct or match your records, give them a call.
Correcting a problem on a credit report can result in a credit score increase of from ten to a hundred points or more.
How to Do It
Once each year, visit AnnualCreditReport.com to get your three free credit reports. Do me a favor, don’t Google “free credit report.” You’ll get a slew of solicitous results, many of which are scams or paid sites. AnnualCreditReport.com is the only government-approved site for your yearly, complimentary reports.
Rather than getting all three at the same time, you can spread this out so that you check a different report every four months. However, if you’re looking for an immediate change and you haven’t looked in the past year, it doesn’t hurt to get it all done at once.
After you retrieve your credit reports and avoid the gratuitous up-selling, check every piece of data on each report for accuracy. Any problem with your personal data can be corrected easily. If there’s a negative item on your credit report that does not apply to you, you have a few options.
You can call the lender directly, especially if it’s an account that’s still open, and let them know that there is an error. Be ready to provide any sort of proof that you may have (statements, cleared checks, etc). If they are unable or unwilling to help, though, you will need to file a dispute with the reporting bureau.
Reporting an error on your credit with each bureau is a much more simplified process than it was just a few years ago. You can either send a letter through the mail or go online and open a dispute. Whether online or through snail mail, include any documentation you have to support your claim.
The credit bureau will then reach out to the creditor in question, and they’ll have thirty days to respond.
Some negative items are supposed to drop off your credit report after a certain number of years, automatically. Sometimes, though, the bureaus overlook this on individual credit reports until someone brings it to their attention. It pays to be vigilant in this situation.
Here are a few of the common reports that should fall off on their own. Be sure to check your report and confirm that your own negative items did indeed disappear as planned.
- Old bankruptcies must be removed from your credit report after ten years.
- Lawsuits and judgments must be removed after seven years, even if you haven’t fulfilled the court order.
- Paid tax liens remain for seven years, and unpaid liens remain for fifteen.
- If you are divorced and your spouse incurred debt when you weren’t married — either before you were married or after your divorce — it should not appear on your report.
If any of the above situations apply to you, and the time period for which the items need to remain on the report has passed, contact the bureau as soon as possible. If you’re correct, they will have the negative items removed.
The best part? Your credit scores should improve almost immediately.
Work On the Big Picture
Keep in mind there isn’t just one credit score. Each bureau has their own formulas and use their own data, and there are several varieties published by each bureau.
FICO8 and FICO9 are the most popular credit scores. When lenders, landlords, employers, and anyone else checking your credit researches your history, though, they could be looking at any one of several sets of information.
Differences in these histories can lead to different credit scores. You never really know which version they are going to pull, so it pays to work on your overall credit picture. While there are differences in scale and exact score formula, the same approaches to the use of money and credit can improve your score across all brands.
You can maintain a good credit score by developing a long history of responsible credit use, not using too much credit, and having a good mix of types of credit. Here are some specific tips:
- Pay your bills on time. If you’re more than 30 days delinquent on any bill, it will negatively affect your score. Pay them on time, every time, and even consider using auto-pay so you never forget — this will also save you wasted money on late fees!
- Keep credit card balances low. The ratio of debt to available credit affects your score; the higher the ratio, the higher your score. Keep this in mind if you consolidate multiple credit cards to fewer. This can result in the same level of debt but a lower level of available credit.
- Don’t open unnecessary accounts. I know from personal experience that being at a sales counter in a store and being offered a 15% discount “just for applying” for a store credit card can be enticing. After all, 15% is a good discount! On the other hand, opening credit card accounts lowers your credit score, thanks to both hard inquiries and your average age of accounts.
- Manage your credit cards responsibly. Use cards properly by paying off the balances quickly and taking care of installment loans. Doing this builds up credit history. Banks will see someone with a favorable credit history as less risk, compared to an individual with no history.
- Closing an account doesn’t help. If you made mistakes in the past, they won’t go away from the credit report simply by closing the account. Some items can stay on the report (and be factored into your score) long after you’ve reformed your ways.
- Keep your oldest credit history. The age of your credit history is an important factor in your score. So, even if you don’t like the terms on your oldest credit card, don’t cancel it. There’s no need to continue using the card, but keep it open. Some cards require you to use it ever-so-often or they’ll automatically close the account for you; be sure to ask about their own policies.
Improving your credit takes time. Aside from fixing errors, there is no “quick fix” to building a good score.
However, if you work hard at decreasing (or eliminating debt), avoiding excessive inquiries, and always paying bills on time, your score will slowly climb. The longer your accounts are open and in good standing, the higher your credit will rise. Your limits will likely increase, as well, which will further improve your score.
Before you know it, you’ll not only have great financial habits established, but a healthy credit score to match.
Updated October 16, 2017 and originally published April 5, 2011.