Tips & Topics - Debt
Improve Your Credit Score
Your credit score is constantly changing based on your specific borrowing and payment history – so it’s in your best interest to take certain actions that improve rather than hurt your credit score. Remember, a credit score not only affects your interest rate on mortgages, auto loans or credit cards, it can also impact your ability to rent an apartment, buy insurance or even get a job.
- The Federal Reserve lists 5 Tips for Improving Your Credit Score to help you start down the path to lower borrowing costs.
- The Federal Citizen Information Center also shows how certain actions directly impact your score. For example, your payment history and the amount you owe on all of your accounts make up about 65 percent of your total score.
- The Federal Trade Commission (FTC) provides information on how the law protects you when it comes to applying for credit or correcting a mistake on your credit report.
- The Fair Credit Billing Act protects you when your credit card company mistakenly bills you for merchandise you never received, or later returned. See Facts for Consumers for information on the Act, and to learn how to dispute a billing error successfully.
Here are ten tips to increase your credit score and potentially lower your debt costs.
1) Get a free copy of your credit report. AnnualCreditReport.com is the only place to get a free copy of your credit report, which provides your credit history, from the three major credit reporting bureaus. Each is required to give you a copy of your credit report annually. To find out what your credit score is, you can buy a copy from one or more of the credit bureaus. There are Web sites that will provide free credit scores, but watch out for special offers with associated costs.
2) Review your credit report and correct any errors. Make sure there aren’t late payments, writeoffs, or other negative information that is not yours. If there are errors, contact the three credit bureaus and file a dispute to correct them. Fixing errors can ensure that your score reflects your creditworthiness. This is also a good way to check if you have been a victim of identity theft.
3) Make payments on time. Paying your bills on time has a large impact on your score and counts for over 30 percent of your score. The longer your history of using credit and paying bills on time, the higher your score will be. The later your payments, the lower your score. Closing an account with a late payment history will not help your score, because it will continue to show on your credit report.
4) Pay down your credit cards. Paying down your credit cards has a bigger impact on your score than paying off installment loans, such as mortgage, auto or student loans. Your score will be increased by continued demonstration that you can use credit responsibly. However, credit card companies have been reducing available credit lines. This has had the effect of making it appear a customer's credit utilization has increased, when in fact it hasn't. Talk to your card issuer and request that they maintain your available credit lines.
5) Use your credit cards lightly. Limit the use of each of your credit cards to 50 percent of the card’s credit limit. Too many maxed out cards could lower your score. Unfortunately, even responsible credit card users are finding that credit card companies have been lowering their available credit lines down to their outstanding balance, which has hurt their credit scores. Again, you should talk to your card issuer and try to maintain your available credit lines.
6) Do not apply for new credit too frequently. Whenever you apply for a new credit card, the creditor pulls a copy of your credit report. Too many inquiries in a short period of time may signal that you are in need of money.
7) Negotiate for a lower interest rate. Paying less in interest each month means having more money available to pay down the balance owed.
8) Deal with collection agencies. Paying collection agencies for overdue debt will not improve your score unless it lowers your total outstanding debt. Negotiate with collection agencies to have them mark the account “paid as agreed” or to have the negative mark removed from your credit report. Get agreements in writing.
9) Do not close old accounts even if you do not use them. Cancelling lines of credit hurts your credit utilization ratio (which is your amount of debt relative to your available credit). A high utilization ratio could lower your score. Also, older accounts demonstrate stability and a track record of on time payments.
10) Do not ruin a good thing. Once you have good credit, keep it that way. Continue to pay your bills on time and limit your exposure to debt.