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Home » Documents » Credit » Improving my Credit Score

How can I improve my credit?

STEP 1 - Pay your bills on time.

Payment history is the single most important factor in determining your credit score, making up 35% of the total. Late payments, especially on your mortgage or rent, have a big impact on your credit history. A recent late payment has more negative weight than one that was made several years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.

When you make a payment by mail, remember that your payment may have to go through several channels before it reaches its destination. Therefore, make sure that you mail your payment early enough so that it will be received and credited to your account before the due date.

If at all possible, consider paying your bills by telephone or online. Many creditors offer this feature for their customers, making it easier to get payments in on a timely basis. Some companies charge a fee for utilizing this service so make sure you find out before you make a payment. Additionally, if you have a checking account, your bank may offer bill payment service, often for free or for a nominal amount. This feature is an excellent way to have your payments automatically debited from your account each month, especially if you have direct deposit.

STEP 2 - Check your credit report and remove any errors.

Payment history is the single most important factor in determining your credit score, making up 35% of the total. Late payments, especially on your mortgage or rent, have a big impact on your credit history. A recent late payment has more negative weight than one that was made several years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.

STEP 3 - Pay down your debts.

Keep balances low on credit cards and other "revolving credit." Maxed out credit limits result in major points deduction. Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. For a good credit score, your account balances should be below 50% of your available credit. To achieve this step, get in the habit of paying more than the minimum amount due. You will pay off the debt sooner and save thousands of dollars in interest payments in the process. A good plan is to start with your accounts that have the smallest balance. After paying off the small debts, direct the extra money toward your larger balances until you are left with only one or two credit card accounts.

STEP 4 - Pay off debt rather than moving it around.

Moving your debts around or constantly transferring balances over multiple cards will not improve your score. The most effective way to improve your score is by simply paying down the amount you owe. See Step 3 above.

On the other hand, if paying off debt is a step you are unable to accomplish with your current income, you may need to meet with a credit counselor. Do your research and make sure the agency is legitimate and reputable. Often, these agencies will provide counseling to you at a nominal charge. If you can prove your inability to pay, the service may even be free. The U.S. Department of Justice has a listing of reputable agencies that have been approved by the government to provide consumer credit counseling. You can access this information at www.usdoj.gov.

Although these agencies have been approved as a prerequisite to filing for bankruptcy under the recent changes enacted in 2005, they can provide credit counseling to consumers who are not considering bankruptcy as well. Please note that this website is only provided as a source to find a reputable credit counseling agency. Renewal does not suggest or advise any individual to pursue bankruptcy as a means of solving their financial problems.

Also, the Better Business Bureau in your area may be able to provide information about whether an agency has a good track record of providing credit counseling assistance. Contact them at www.bbb.org or consult your local telephone directory.

STEP 5 - Avoid too many inquiries.

Don't apply for too much credit in a short amount of time. Inquiries are interpreted as a sign that you have been actively seeking credit, and may be in financial difficulties or in the process of overextending yourself. Multiple requests for your credit history (not including requests by you to check your file) will reduce your score. Fortunately, inquiries from businesses from whom you have not applied for credit will not affect your score. These usually come from unsolicited pre-approved credit offers. Inquiries from employers (potential or current) do not affect your score either.

A good rule of thumb to keep in mind when shopping around for a good loan rate is to look within a focused period of time, such as 14 days. Creditors distinguish between a search for a single loan and a search for many new credit lines, based in part on the length of time over which recent requests for credit occur.

Although inquiries remain on your credit report for two years, your credit score is only affected by inquiries within the last 12 months.

STEP 6 - Have credit cards, but manage them responsibly.

In general, having credit cards and installment loans which you pay on time will raise your score. This is especially true for someone who has a shorter credit history. Your credit score takes into account your mix of credit accounts. Installment accounts (such as mortgages and automobiles) have the most weight. Although not a hard and fast rule, an individual who has no credit cards tends to have a lower score than someone who has managed credit cards responsibly.

A good rule of thumb for someone who is just getting back on their feet financially is to have no more than four credit cards. Use them all but do not charge more than 30% of the available balance. Also, only charge what you will be able to pay off completely each billing cycle. Keep the other card for emergency purposes. The sale of the century at your local department or electronics store does not qualify as an emergency!

STEP 7 - Try to keep your earlier accounts if possible.

In general, a longer credit history will increase your score. Approximately 15% of your total score will depend on your credit history. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. If you have older accounts that are in good standing, don’t close them. Purchase something sparingly, every other month or so, to keep the account active. Remember, charge only what you can pay off completely when you receive your statement.

If your older accounts have a few blemishes, contact the creditors to see if they are willing to negotiate with you. For instance, if you have had a department store credit card account for ten years but had a couple of late payments six months ago, contact the creditor.

Because you have been a loyal customer with an overall good payment history, they might be willing to work with you and delete the late payments.