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Three Easy Steps to Improve Your Credit Score

Did you think you were done with keeping track of test scores when you graduated High School or College? If you are a typical working American, you are far from done with scores – one of your most important scores is your credit score.  Luckily, you don’t have to study or take tests to have a credit score.  However, you may need to do a little work to improve your score, especially if you have a low score or no credit history.  Having a good credit score is important—it can save you loads of money in the long run.  Read on as we reveal the mysteries of credit scoring and explain some simple things you can do to improve yours.

Your credit score is an assessment of your credit worthiness, and is based on your credit history.  If you pay all your bills on time (including loan payments and credit card bills), you probably have a good credit score.  Many of us, however, have suffered through times of financial crisis –unemployment, medical problems (and the bills that come with them!), unexpected car expenses, or even identity theft.  In these financial crunches, you have likely missed a few payments or defaulted on a loan or credit card.  These late payments and defaults are recorded in your credit history and can ruin your credit score.

A low credit score (“low” or “poor” credit is generally a score below 650) can have a big impact on your financial situation in the future. People with low credit scores have a difficult time getting credit cards and loans. The lenders who are willing to lend to people with low credit scores charge much higher fees for their loans and credit cards.  People with low credit scores can have a difficult time passing employer background checks or getting insurance.  It’s sad but true – nowadays, people with low credit scores have a much more difficult (and costly) existence. 

If you have a low (or marginal) credit score, you can take some simple steps to improve it.  These steps will save you time, aggravation, and money in the long run! 

Step One: Understand what a “credit report” and “credit score” are.  The three national credit reporting agencies are Equifax, Experian and TransUnion. These agencies act as warehouses for your credit and payment information.  Your credit report contains personal data, which includes your name (priors and variations), birth date, addresses, Social Security number, and past and present employers.  In addition, creditor history, inquiries or authorized credit checks, relevant public records and collections are also used for identification purposes

Your credit report card includes your creditor history detailing your accounts, payments to banks, credit unions, finance companies, mortgage companies, credit card companies, retail stores and other creditors.  These credit lines detail if you pay on time, balances, credit limits, burden of debt and how long you have had your account.  Other than you, outsiders can access your credit report by making an inquiry.  Credit card companies are notorious for making inquiries, and you can see on the credit report who has accessed your account, and when. Relevant public records and collections are also on your credit report.  This may include bankruptcies, foreclosures, tax liens and any collection agency debts you may have incurred.  A foreclosed property can remain on your report for as long as seven years, Chapter 7 bankruptcy for 10 years and, depending on your state, unpaid tax liens can remain on your credit report indefinitely.

The industry standard for calculating a credit score was invented by The Fair Isaac Corporation (FICO).  The scores generate a three digit number ranging from 300 to 850.  Credit scores are used to assess your level of credit risk by predicting whether you will pay back your credit obligations in a timely fashion.  The higher your score, the better credit risk you are.  Because there are three different credit agencies, consumers who have a credit report have three FICO scores.  Creditors use these scores to determine if they are going to grant credit to a consumer and what interest rate they will charge. 

Are you 100% confused yet?  It might bring some consolation to know that information about credit reports is getting better.  Before 2001, consumers did not have access to their credit scores.  Now you can get free copies of your credit report once a year from each of the three reporting agencies.  Get yours here.

Now that you understand a little bit about your credit report and your credit score, lets review a few simple steps you can take to improve your report and your score.  The credit bureaus are constantly gathering information about you and watching your payment histories.  If you’ve suffered through financial emergencies in the past, take steps now to start improving your credit history – even simple actions can go a long way toward improving your score.

Step two: Get a copy of your credit report from each of the three major bureaus noted above.  Review the report and make sure that the report is accurate! Credit bureaus make mistakes.  Make sure they haven’t made one on your report.  If they have, follow the procedures described in your report to correct the mistakes – fixing a few errors can dramatically improve your score. Lenders can also consider your income, a spouse’s income, an appraisal report from a licensed appraiser and other factors when considering an application for credit.  If you are turned down for credit, by law, lenders must advise you of the reason in a rejection letter.  There could be an error in your credit report which you can fix and possibly increase your score.  All the more reason to check your credit reports regularly.

Step three: Make loan and credit card payments on time, and make sure that you have a reasonable amount of balance available on your credit cards (that is, don’t “max out” all of your cards!).  Your level of debt and payment performance account for a whopping 65% of your FICO score.