Know the Score

Your credit score is a three digit number ranging from 300 to 850 that is the key to your borrowing costs. In order to improve your credit score, it is important to know where you currently stand. You will pay a fee to find out your credit scores, each of the credit bureaus have their own or you can go to MyFico.com and obtain all three at once. You are entitled to a free credit report once a year from each of the three credit bureaus. Go to www.annualcreditreport.com for your free reports if you have not already received yours for the current calendar year.

Credit Repair Steps

  1. Pay down your credit cards. Paying down your installment loans such as your mortgage, car loans, student loans, etc. can help your score but not as dramatically as paying down or paying off revolving accounts like credit cards. The credit scoring formulas like to see a nice big gap between the amount of credit you are using and your available credit limit. Getting your balances below 30% of the credit limit on each card can really help. While most credit counselors recommend paying off the highest rate card first a better strategy is to pay down the cards that are closest to their limits. Once your account has been paid off do not close the account as this will decrease the amount of your total available credit.
  2. Use your cards lightly. Racking up big balances can hurt your score regardless of whether you pay your bill in full each month or not. Typically the balance on your last account statement is what is reported to the credit bureau each month. You may be able to increase your score by limiting your charges to 30% or less of a card's limit.
  3. Check your limits. Your score might be artificially depressed if your lender is showing a lower limit than you've actually got. Most credit card issuers will quickly update this information if you ask. If your issuer makes it a policy not to report a consumer's limit (as is the case with American Express and Capital One) the credit bureaus typically use your highest balance as a proxy for your credit limit. You may see the problem here: If you consistently charge the same amount each month -- say $2000 to $2500 -- it may look to the credit scoring formula that you are maxing out that card each month. A solution is to pay off your balance before your statement period closes. Check your last statement to see which day of the month that is, then go the issuer's web site about a week in advance of closing and pay off the balance or pay down a significant amount. It won't raise your reported limit but it will widen the gap between the limit and your closing balance which should boost your score.
  4. Dust off an old card. The older your credit history the better. However, if you stop using your oldest cards the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear but they won't be given as much weight in the credit scoring formula as your active accounts. Use your old cards every few months to charge a small amount paying it off in full when the statement arrives.
  5. Get some good will. If you've been a good customer a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing and your chances improve for a "goodwill adjustment" the better your record is with the company. A longer term solution for more troubled accounts is to ask that they be "re-aged". If the account is still open the lender might erase previous delinquencies if you make a series of 12 or more on time payments.
  6. Dispute old negatives. Say that fight with your phone company over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust or you can try disputing the account with the credit bureaus as "not mine". The older and smaller a collection account the more likely the collection agency won't bother to verify it when the credit bureau investigates your dispute. Some consumers have had luck disputing old items with a lender that has merged with another company as they are unable to trace the old items.
  7. Dispute significant errors. Your credit score is calculated based on the information in your credit report so certain errors can really cost you.

Here's the stuff that is usually worth the effort of correcting with the credit bureaus:

  • Late payments, charge-off, collections or other negative items that aren't yours.
  • Credit limits reported as lower than they actually are.
  • Accounts listed as "settled", "paid derogatory", "paid charge-off" or anything other than "current" or "paid as agreed" if you paid on time and in full.
  • Accounts that are still listed as unpaid that were included in a bankruptcy.
  • Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your report. You actually have to be careful with this because sometimes scores actually go down when bad items fall off your report. It's a quirk in the FICO credit scoring software and the potential effect of eliminating old negative items is difficult to predict in advance.