Did you know credit scores are used to determine insurance premiums and also used to screen job applicants? We don’t like to talk about our personal credit history, because it’s something to keep private. In fact, 30 percent of consumers are more embarrassed about their credit score than weight, according to a survey conducted by National Foundation for Credit Counseling. This shouldn’t come as a surprise, but, it’s not until you fill out an application for a credit card or loan you discover just what your score is and realize how much it impacts your life.
Ways to Improve Your Credit Score
A government study reveals some 40 million consumers have at least one error on their credit files, and, 20 million contain significant errors, causing credit denials, according to an investigative piece by CBS News. What’s worse, the three major credit reporting bureaus don’t make it easy to correct said errors. Experian, Equifax, and TransUnion all have online dispute forms, but these are insufficient. When you learn your credit score is low, you’ll obviously want to give it a boost.
There are a lot of rumors circulating when it comes to credit scores and how to improve them: Do you really need to pay a credit repair company to increase your score? (No.) Will getting married help raise it? (No.) Will making on-time payments every month give it a boost? (Yes.) If you want to make your score better, perhaps because you plan to take out a sizable loan in the future, consider [the right] strategies. —U.S. News and World Report
We’ve all seen the signs, television commercials, and heard the radio spots about credit repair, but, the Federal Trade Commission advises consumers there’s nothing you can’t do on your own to improve your credit score. While these tactics won’t necessarily work overnight, they will make a difference. First, it’s important to understand how your score is computed. Five elements are factored to determine your score: payment history (35 percent), credit utilization (30 percent), credit history length (15 percent), new credit (10 percent), and credit mix (10 percent). So, start by ordering free copies at Annual Credit Report.com and then, do the following to raise your credit score:
- Find and dispute all errors. Chances are quite good your credit report contains errors. Since these are so common, go over your credit file from all three reporting agencies and dispute each one, in writing, submitting proof of payment when applicable.
- Negotiate old account balances. You might have an old debt or two on your credit file you’d prefer to just ignore. That’s not a good option as these only hurt your score. For old accounts, contact creditors and negotiate. Offer a lump sum of 40 to 60 percent and only make payment with a money order or cashier’s check. Get the agreement in writing stating the credit will accept the amount and report the balance paid to the credit bureaus.
- Lower your outstanding balances. One of the best ways to boost your credit score is to pay down your balances. If you have recently opened accounts, it’s okay to pay these off and close them so you don’t have too much available credit (something that’s considered potential debt by mortgage lenders).
- Don’t open new accounts for a better credit mix. Avoid opening new lines of credit simply to try and gain a better credit mix. Instead, use different accounts for different monthly bills and be sure to make payments on-time, every time.
In addition to these steps, you should always be mindful of your DTI or debt-to-income ratio. Your monthly obligations should be no more than 35 percent of your take-home pay. Lenders also prefer you to have cash set-aside for an earnest money deposit, inspections, moving, closing costs, and down payment when you apply for a home loan.