The problem is you don’t know where to start and with so many resources available, you become paralyzed with fear. But you know you can’t sit still forever. So, what’s your next step?
You don’t need complicated strategies, you only need a few that work. The tactics provided in this list are proven to increase credit scores. While your credit score won’t improve overnight, it’ll improve quicker than most.
First let’s take a look at what your credit consists of.
What your credit score is based on:
- 35% payment history. How reliable you are. Late payments hurt you.
- 30% amounts owed. How much you owe and how much credit you have available, or your “credit utilization rate.”
- 15% length of history. How long you’ve had credit. Older accounts are better because they show you’re reliable.
- 10% how many types of credit. If you have more lines of credit open, the better your score will be.
- 10% account inquiries. How many times you have or a lender has checked your credit background.
Dispute old, small collection accounts
The latest version of the leading credit scoring formula, the FICO 9, already ignores collection accounts where the original balance was less than $100. Not all lenders use this formula, though, so you might see an increase in your scores if you dispute that $50 parking ticket you forgot to pay or the $75 medical bill that slipped through the cracks of your insurer’s reimbursement system. The collection agencies that report these minor bills may not bother to respond to the credit bureaus’ investigation attempts, especially as the accounts approach the seven-year mark, where they’d have to be dropped from your credit reports anyway.
Have a good payment history
It should come as no surprise that not paying your bills, especially on existing credit cards, can quickly bring down your score. FICO and other credit scoring models consider this factor of the highest importance. Your payment history accounts for 35 percent of your total credit score.
What counts in your payment history? Typically, your credit cards and loans are included as well as these accounts:
● Home mortgage
● Car loans
● Student loans
● Cell phone bills
● Medical bills
● Store credit accounts
● Bank lines of credit
One late payment may not have a huge impact on your score, but several will. A pattern of late payment behavior is a telling sign to creditors that you are a higher credit risk, and your score will change to reflect that.
Follow the “30% rule”
If you’re constantly maxing out your limits on your credit cards, you’ll want to adjust your habits to boost your credit score. The general rule is that it’s best to keep your balance under 30% of your total credit limit. In fact, a principal scientist at Fair Isaac Corporation says, “Consumers with FICO scores of 800 use, on average, 7% of their available credit.” Maxing out your credit card every month can send false signs to lenders that you aren’t great at budgeting your regular income.
Do Not Close Old Accounts
Closing old credit card accounts reduces the overall credit available to you, thus raising your credit utilization, and it reduces the average account age. Opening new accounts just to manipulate your credit utilization does not help, and opening multiple accounts indicates higher risk.
Pay off your credit cards with a Personal Loan
Paying down your credit card balances widens the gap between your available credit and the amount you’re using, which is great for your scores. If you can’t pay your cards off immediately, consider moving the balances to a three-year personal loan. Balances on such installment loans don’t affect your scores as strongly as balances on credit cards.
Patience is key
While these tips are good places to start, they aren’t a guarantee of improvement. Your report and score are dynamic. For example, even if you lower your balance to zero, but incurred a late mortgage or rent payment to do that, your score may stay the same or get worse.
The credit fairy will not magically appear and instantly correct your poor score. When you’re starting with a low score, credit repair can seem impossible. Hang in there and continue to repeat these steps to ensure a better FICO score.