There are several things anyone can do to increase their credit scores. Here are a few tips you can use.
As you know, your credit score is very important. Lenders determine not only if you are qualified for a loan, but also if you are qualified for a better interest rate and/or terms than the average borrower.
There are 5 areas or criteria that the FICO credit score model uses to determine a credit score:
Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used 10%
Of these, probably the area which hurts credit scores the most is the reporting of incorrect information in the Payment History area.
There are many reports that give the percentages of people with errors on their credit reports, but I'd say that at least 25% -35% of all of us may have errors.
What does this mean?
Well, let's say you paid off a credit card, but the creditor never reported it as paid in full to the credit bureaus. Your score could take a 15 - 25 point decrease and that just might disqualify you for the mortgage or other loan you were seeking.
Here's what you need to do to make sure there are no errors or what you need to do to get those errors corrected:
(1) Request an updated Credit Report.
By law, the credit bureaus must provide you with a FREE Credit Report annually. But, you must request it!
To get a copy of your credit report, go to www.annualcreditreport.com.
Follow the instructions (don't pay for anything!) and you will be able to download your credit report in about 15-20 minutes.
(2) Take your time and go over your credit report, looking for errors.
If you find an error, then you will want to go to the credit reporting agency's website to open a DISPUTE.
You will need proof that you have paid the debt, such as a canceled check, account statement from the creditor showing a $0 balance or a bank statement showing when and how you paid.
Here are the links to the top 3 Credit Reporting Agencies:
Follow the instructions and you should be able to have those errors corrected or even removed.
(3) Look closely for older accounts being reported that may have passed the statute of limitations for your state.
For example... In Oregon and Washington, the statute of limitations for collecting on unsecured credit accounts is 6 years.
This means that if there has been no payments made for over 6 years, the credit bureau must remove that account.
This time, you are going to submit a written "challenge" to that account as being past the statute of limitations. You should be able to do this on line as well.
It will take 30 -45 days for the credit bureau to investigate and make changes, so keep checking back until it is resolved. Yes, a little work, but well worth it overall!
Another very important thing to remember about improving your credit score is to understand how the credit bureaus view or interprets not only the type of credit account you have, but also how much credit you are using in relation to your income and in relation to your AVAILABLE CREDIT!
This can be a little confusing, so let me try to explain as simply as I can:
Let's say you have 5 credit cards with a total of $20,000 of available credit. You have a total balance on 3 of the 5 cards of $7500. The other 2 cards have $0 balances.
$7500 divided by $20,000 = 37.5%
To them, you are using 37.5% of the available credit to you, which although is not terrible, is still a little high. A 20% ration would look better, so start making every attempt at reducing those balances.
BTW...it does not help your credit score to combine all 3 cards into a new account!
Also, don't think that by closing a couple of accounts that have a zero balance will help your credit score.
Actually, it will hurt! Watch....
Let's say you closed those 2 accounts with a $0 balance each. And let's say that each of those cards had a $2,000 credit limit.
Now your ratios would look like this:
Total available credit $16,000
Total credit being used $ 7,500
Ratio $7500 / $16,000 = 46.9 % ! ! !
Do you see what happened? To the credit bureaus, you are not using almost 50% of your available credit.
This is too high and will hurt your score.
So, don't close accounts!
Finally, there is one other thing you can do to help your credit report and therefore improve your credit score:
Make the creditor that is reporting the account VALIDATE the account.
Demanding a VALIDATION of a reported account means that the creditor must prove that the account is indeed, valid by providing a copy of the original contract, payment history, etc.
I've written another blog about this that will give you much more information if you are interested.
While I believe that any time you see a debt listed on your credit report that you know in not valid, you should challenge it.
However, I know that many so called "Credit Repair Companies" use the "validation" technique to see if they can get the credit bureaus to remove items that the consumer may or may not owe. The theory is that the Credit Bureaus (which are in business to make a profit only) may just remove a challenged item rather than go to the trouble of making a full investigation.
Let your conscience by your guide as the saying goes, but if you legitimately owe the debt, then take care of it. Many time a creditor or debt collector will take a reduced amount to SETTLE the debt.
To learn more, click below:
The bottom line is that to improve your credit scores, you must:
- Know exactly what is being reported
- Watch those ratios!
- Get errors removed as soon as possible