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Short Introduction to Credit Scores

You've most probably heard that there are several Credit Bureaus that keep track of everyone's' credit scores, but you'll be surprised for sure to find out that you have several credit scores as well. The aim of this guideline of improving your credit score is to help you understand what you have to do to improve your credit rating. The best way to reach this is to generally understand what are the elements of the credit scores, and how can you impact them.

So, the elements of a credit score are as follows:

  • The number of accounts you have
  • The types of accounts
  • Your used credit vs. your available credit
  • The length of your credit history
  • Your payment history

Important! Therefore, the strategies you should use to raise your credit score should target the above-mentioned element where the problem is.

10 Basic Steps for Improving the Credit Score

Now that you have a better understanding of how your credit score is calculated, here are a few ways in which you can improve your rating and lower your risk in the eyes of the lenders.

1. Get a Copy of Your Report

If you don't know what needs to be fixed, you can't improve your credit. Did you know that even the credit bureaus say that 79% of credit reports contain errors? How to get a free copy of your credit report? Nothing more simple: you are entitled to get a free credit report every year from each of the three nationwide credit bureaus (Experian, Transunion, Equifax).

You can get it in 3 ways:

  1. Order it online from the only authorized website for free credit reports. You will need to provide your name, address, social security number, and date of birth to verify your identity.
  2. Order it By Mail: Complete the Annual Credit Report Request Form (PDF) and mail it to:
    Annual Credit Report Request Service
    PO Box 105281
    Atlanta, GA 30348-5281
  3. Order it by Phone by calling 1-877-322-8228.

2. Clean Up Your Credit Report

Identify where the errors are and start having them removed. It's your right to dispute any entry on your credit report that you think is a mistake. Don't believe it's as easy as some articles on websites suggest. Each error must be disputed individually. You can't just send in a letter asking for 5 or 6 errors to be fixed. You will need time and tenacity.

If the job looks too big or too hard for you, then get some expert help. Be careful of companies that promise to improve your credit score but will make the problem even worse. You already have enough problems.

3. Stop Using Your Credit Cards

Stop adding more debt. More debt, higher payments each month, equals more chance of being late on some of them. Cut up or cancel the credit cards. Too hard? Then put them away and stick to using cash or debit cards.

However, you can improve your credit score by making payments on time. At least 12 months of payments made on time are used by lenders to assess your credit risk.

4. Get up to Date on Accounts that are Past Due

At least 35% of your credit report is made up from the way you pay your bills. Get up to date on payments and improve your score. In fact, it might be less simple than it sounds if we take into account recent statistics that reveal that 56 million Americans do not pay their bills on time. That is every fourth adult in the United States.

  • Get organised.
  • Keep track.
  • Budget your money.
  • Experiment with different payment methods.
  • Check your bills regularly.

Paying bills can be a real problem, and if you’re struggling to keep the pace, don’t ignore it. Do everything that you can to get up to date on accounts that are past due.

5. Don't Apply For Any More Credit Cards

Remember: Your aim is to repair your credit, not make it downwards. Don't apply for other credit cards. Applying for more credit does not improve your score, it lowers your score. Open lines of credit affect your credit rating.

Given the fact that new credit builds up 10% of a FICO Score, recent data shows that opening a couple of new credit accounts in a short period of time represents greater risk - especially for people who don't have a long credit history.

Despite the fact that only the last 12 months are taken into account for the FICO Scores, every inquiry for new credit remains on your credit report for two years. And this is not an encouraging trend since people tend to have more credit today and shop for new credit more frequently than ever.

6. Keep Accounts with Balances Open

Closing delinquent credit cards will probably have a negative effect on your credit score. That's because your credit score calculation also takes into account the period you had the credit cards. Owning your credit cards for a while shows your lenders that you are not flakey.

To be more specific, the credit history length accounts for 15% of your credit score, and it still has an important weight for lenders, as a longer credit history will always have a positive effect on FICO Scores. It can impact the chances of whether or not you get a loan.

According to FICO methodology, mainly 3 things are taken into account in the process of assessing the credit history length:

  • How long your credit accounts have been open, including the age of your oldest account, the age of your newest account, and an average age of all your accounts.
  • How long specific credit accounts have been open.
  • How long it has been since the account has been used.

Of course, sometimes it seems that shutting down that credit card that you just paid off after years of making payments is the right thing to do, but before you proceed, take a moment to assess what impact closing that account may have on your length of credit history. It may be better to keep it open for the sake of maintaining the average length of your history.

7. Behind on Payments? Call your Creditors!

You may not want to speak to them, but you must. Let them know that you are open to working this situation out.

  1. Contact your creditors,
  2. Ask for alternatives and solutions,
  3. Propose compromises.

Of course, each lender has its rules and procedures that envisage debt collection, but contacting them and trying to figure out a plan is in their interest as well. Prepare the justifications, the documents, and other support materials that could be sent to your lender along with an explanation of why you are unable to pay your debts.

8. Pay Off all Your Debts Completely

There is no way you can have an improved credit score without all your debts being behind you. Research your alternatives on how to do that better. You can try to go through it by yourself, you can hire an expert and follow their advice.

One thing is sure: debt won't disappear by itself. You need to search for a strategy and keep working towards paying your debts entirely.

9. Credit Counseling Might be Worth Considering

Consider a counseling service if your debts and high-interest rates mean it will take you the next 30 years to pay them off. More affordable payments will help you make payments in full, on time. That will improve your credit score and eliminate debt.

There are people who do this for a living - they know the differences between the existing debt repayment strategies and understand better how they work in practice. They will certainly be able to tell you which solution is best for you.

10. Patience

Remember, "Rome wasn't built in a day." It took you a while to get into debt, it might take a while to get out of debt.

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