Tuesday, August 09, 2005

10 ways to raise your credit score

Maintaining good credit is a fine balance. Your credit score can drop if you have too many credit cards, too few credit cards, if you close too many accounts, if you open too many accounts, if you have too much debt, if you have too little debt, the list goes on. The converse is also true. Just as a number of things can lower your credit score, there are a number of things that can raise them too so if your score is below 720 (the national median that mortgage companies use to decide who gets what interest rate) take heart; there's hope.

The first thing anyone setting out to improve their credit score should do is to understand how they are calculated. There are 5 major factors that make up your credit score:

35% payment history
30% amount owed
15% length of credit history
10% credit history overall
10% types of credit

That is, 35% of your score comes from your recent payment history and 30% from your outstanding balance and so on and so forth. It's not quite as simple as that because within each category there are further factors that influence your score. For example, although payment history overall gets 35%, your current payment patterns carry far more weight than your payment habits of 5 years ago. This is both good and bad. It's good because even if you have been late with payments in the past provided you keep paying your bills on time you will see your score improve each year. It's bad because even if you have had been meticulous about paying all your bills all your life a recent slip (meaning a late payment in the last 24 months) can result in a severe penalty and lower your score by as much as 50-100 points.

MyFico.com has some excellent articles that explain your credit score and also offers a free credit score simulator where you can see how your score will improve over time if you make certain changes like paying off the account balance on one credit card first vs another. If you haven't yet I suggest signing up for it and using the tool to analyze your current credit record to identify areas where you can improve. If you are not ready for that hassle yet here are 10 relatively uncomplicated ways you can raise your credit score:

1) Pay all your bills on time. If you can't make full payment, at least make the minimum payment. As you can see from the 5 major factors that make up your credit score section above, timeliness of payment carries more weight than your outstanding balance.

2) Pay delinquent or high-risk accounts first. If you have an account where you are already more than 30 days past due pay that first. If you have an account where you are carrying a balance dangerously close to your credit limit whereas you only carry a small balance on another card, pay the first card first even though you may be tempted to pay off the second in full. Creditors will see a near-limit credit balance as a bigger threat than two small balances on two cards.

3) Apply for different types of credit. Having a mortgage, a car loan, a bank card and 3 or 4 department store cards will actually make your score higher than having only department score cards even if your overall number of accounts is lower. I am not saying run out and buy a new car but just be aware how different types of credit affect your score.

4) Don't open any new accounts in the 12 months prior to applying for any major credit like a car loan or a mortgage. Don't close any old accounts either even if you are not using them because closing older accounts reduces your length of credit history which can count against you.

5) Don't close accounts if you are within a few months of applying for a loan. Any activity on your credit report can be viewed with a wary eye by a potential lender if it happens too close to the loan date. On the other hand if you have 10-12 months to go, go ahead and close newly opened accounts. Try to close newly opened accounts before older ones for the same reason outlined in #4 - length of credit history. If the newly opened accounts are department store accounts even better. Right after you close these accounts your credit score may take a slight downturn but at the end of twelve months your score should be higher than what it was before. One caveat - closing accounts lowers your total available credit and therefore raises your debt to credit ratio. Optimal D/C ratio is 0.5. That is, if your total available credit across all accounts is 50,000 your outstanding balance should be 25,000 or lower.

6) Time your payment. You may think you are paying in full every month but your credit report may show something else. Why? Because they creditors report your account status to the credit agencies on a monthly basis at the same time (typically beginning or the end of the month) which has nothing to do with your due date. The amount that gets reported is the amount you were carrying on your credit card at the time they reported it. Find out when that happens and try to make your payments before that date. This does not matter so much if you have a small balance to start with but if your debt to credit ratio is over 0.5 it may help your score quite a bit over the long run.

7) Call creditors. Check your credit report and if you see anything in there that is making your score lower, call the creditor who reported that to the credit agency and request, respectfully, deferentially and politely, for it to be removed. I had a recent late payment on my Amex account but when I called them and explained that I was shopping for mortgages and it was making my score lower they actually offered to take it off my report. I didn't even have to ask. So, make that call. If you have an account in good standing with a creditor they will be willing to work with you.

8) Contest bad credit marks. Mistakes happen and things may end up in your credit report that rightfully belong on someone else's. Make sure to check your credit reports from all 3 agencies at least once a year and look for discrepancies. If you find any, be sure to contact the credit agency and let them know. Do this in writing, use correct language and know what you can contest. e.g. You cannot contest a legitimate delinquency (contact the creditor) but you can contest an unauthorized credit inquiry and request its removal.

9) Check your credit report at least once a year or if not that then at least 10-12 months before you apply for any big credit (e.g. mortgage or car loan). As of June 1st this year all western, southern and midwest states are eligible for 1 free cedit report each year from each credit reporting agency. (Eastern states & other US territories become eligible for this starting Sep 1). You can make your request at AnnualCreditReport.com which is an Experian, Equifax and TransUnion supported centralized site for just this purpose.

10) Carry copies of your credit reports and scores with you when you go loan shopping. Credit report inquiries can hurt your credit score. Every time you apply for credit, the lender will look at your credit, which creates an inquiry on your report. Supplying your own copy of your report to the lender if you are just shopping around for rate quotes can prevent this. In the event that the creditors insist they must pull a report, try to do your entire rate shopping within a two-week period. A quick influx of inquiries only counts as one.

I have decided to table my house search for now and focus on improving my credit score. Real estate prices in Seattle have been skyrocketing over the last few months and I am not sure it's the best use of my meagre savings at the moment. (See the comments here.) I am not entirely giving up looking at properties but for the most part I will keep it informational so I can find out more about neighborhoods and such while I work on raising my credit score.

Other than that one late payment on Amex I haven't missed any payments. However I have closed some older accounts (alas this was before my days of credit score enlightenment) and opened a few department score cards in the last twelve months. In addition I also got a new car at the end of 2004 and just signed a new apartment lease last month. All this is making my credit score lower. Left alone my score should adjust over time as the new accounts age but I do think I have too many accounts so I plan to close some of them. I will close the newly opened department store cards first because they have minimal effect on my score, good or bad. My debt to credit ratio is already pretty low but I noticed that on my TransUnion credit report some creditors reported only the balance without the limit which gives a false effect that my D/C ratio is higher (my TransUnion score is also the lowest). I plan to contact both the card companies and TransUnion to see how that can be fixed. According to the MyFico credit score simulator my score should be at least 37 points higher or 751 by next June if I make these changes.

Disclaimer: I am not an expert on the subject of credit. Please do your own research and double-check facts before you use any of the information provided in this post.


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