7 Helpful Steps to Improve your Credit Score

If like many Americans you’ve had trouble making on-time bill payments in the past, chances are that your overall credit score has suffered. More than 30 million people in the U.S. today have FICO scores under 620, which makes it harder for them to obtain good terms and interest rates on future loans and credit lines. Fortunately, the damage to your credit score is reversible.

The following is a simple guide to improving your credit score. The key to successfully repairing your FICO score is being able to follow the rules you set for yourself. Financial discipline is essential.

1. Correct any mistakes on your credit report
   The first thing you need to do is obtain a copy of your credit score and credit report online from one of the three major credit bureaus (Equifax, Experian, and Trans-Union). As you might know, everyone is entitled by law to one free credit report per 12 month period. Review your credit report and correct any obvious mistakes. This task requires that you contact your creditors and retailers to sort out any errors. It can be a lengthy process, but it is essential.
2. Make on-time minimum payments
   Make at least the minimum payments on your credit debts every month. You will have to budget your expenses closely and it will not be easy, but making on-time payments is the most important factor affecting your FICO score. Lenders are not as concerned with whether you’re paying more than the minimum on your bills as much as they are with whether you’re making the payments on time. Timely payments account for 35% of your credit score, so this is the area in which you can do the most to boost your score.
3. Reduce your debt-to-available-credit ratio
   About 30% of your FICO score is based on how much money you owe. The larger the amount of debt you have, the lower your credit score will be. The best way to improve this aspect of your score is to start paying down your loans. The more you reduce your debt-to-available-credit ratio, the better your score will be. This requires, of course, that you start making more than your minimum payments. A good strategy is to start paying down the biggest debts first, as these are the ones most at risk of defaulting, and look bad to any potential creditor reviewing your report. However, it will do no good to transfer debt from one credit card to another, as the FICO score concerns itself with your total debt, not with how it is distributed amongst your different credit lines.
4. Don’t cancel all your cards
   Part of your credit score (about 15%) is determined by the length of your credit history. This is a hard area of your FICO score to improve, as only having a good line of credit for an extended period of time is the only way to do so. The best way to deal with this is to pay off the newest accounts you have and close them. Keep the two or three oldest accounts open, as this will increase the average length of your total credit history. If you are just starting off and have no real credit history, open two accounts and stick to them for a while before opening new ones. One of these accounts should be a revolving credit line and another should be an installment credit line.
5. Handle new credit lines responsibly
   About 10% of your credit score is based upon your handling of new credit lines. Opening up too many new accounts will hurt your FICO score, even if you make payments on time, because the move could signal that you are planning to go on a borrowing/spending spree. This is the same reason why making too many inquiries into your credit score will likewise lower it. However, according to Fair Isaac and Co. (creators of the FICO scoring system), inquiries into your credit made by lenders without your consent will not affect your score.
6. Learn to handle both kinds of loans
   Another 10% of your FICO score depends on how well you show you can handle the two kinds of credit lines. Open ended, or revolving, credit refers to things like credit cards, which have no fixed number of payments but which can keep going for as long as you use them. Car loans and home loans are examples of installment loans. These credit lines have fixed number of payments, and ones those payments are completed, the line is closed. To raise your FICO score you must demonstrate that you are capable of handling both kinds of credit lines well. Make sure you keep at least one of each kind of credit line going, and make on time payments on both.
7. Don’t hesitate to seek debt resolution
   If you are overloaded with debt and need help setting up a good repayment plan, don’t be afraid to seek debt resolution help.  However, beware of scams. There are plenty of so-called “debt-settlement firms” that do not have a good performance record. With Credit Counseling most have found they end up spending more money than they owe. Make sure that the resolution company you are dealing with has an outstanding BBB record.  For more tips on how to get out of debt consult one of our professional debt advisors.