Improving your credit score is not something that can be done overnight, but it's a process that is certainly worth the effort. Take the steps suggested by credit experts to raise your score and increase your chances of obtaining credit application approvals at much lower interest rates.
Know Your Score
Noted credit scoring expert Nabil Captan explains that the first step in improving your credit score is to find out what score you currently have. It turns out that the score you obtain from an online provider may not actually be your true score. "For years, the three national credit bureaus Experian, Equifax and TransUnion have been making millions of dollars selling their own versions of credit scores," says Captan. "They never disclose to us that their scores are not used by most lenders."
Your "FAKO" Score and Your FICO® Score
Plenty of websites offer free estimates of what they suppose your credit score may be based on the information you provide. These scores are referred to as "FAKO scores" by Captan, as they are not truly the scores that potential lenders see when they review your credit profile.
Do not rely on FAKO scores to:
- Tell you what your credit score is
- Tell you if you have been successful in raising your credit score
- Compel you to panic about your score
"The Fair Isaac Corporation is the originator of credit scoring models that date back to the late 1950's," says Captan. "These models were created to help businesses make smarter decisions when assessing risk. The FICO® score remains the gold standard to date and is used by 90 percent of all banks." Find out what your credit score is directly from the source - in this case, FICO®, and then begin your efforts toward improving your score.
"Simply go to the FICO® website and get your real FICO® score that all lenders view when considering you for any type of credit," says Captan. "Why would you want to go anywhere else?"
Improve Your Score
Once you know your credit score starting point, it's time to get actively involved in raising the number. Some fixes are relatively simple to do while others will take more time and effort.
According to some estimates, nearly 80 percent of credit reports contain an error, with approximately a quarter of those errors being serious enough to potentially result in credit denial. Closely review your credit report and immediately report any errors. Removing inaccurate information from your credit report may result in a quick increase in score.
If you have fallen behind in making payments, or if you have some old debt that is still showing up on your credit report, Captan suggests quick action.
"Get current and stay current if you have missed payments," he urges. "Contact your creditors if you are having trouble making ends meet." Creditors may be willing to work out a new payment plan, but unless you have open communication with them, there is no way to request adjustments.
"Pay your bills on time," Captan says. "Delinquent payments and collections can have a significant adverse impact on your score. Make sure you get your payments to your creditors on or before the due date on your statements."
Author and credit expert John Ulzheimer agrees. "The biggest problem with consumers that have poor credit scores is their inability or unwillingness to make payments by the due date. Some people view the due date as a suggestion rather than a hard and fast date."
"Credit crises can be overcome by changing payment patterns," says Captan. "The longer you pay your bills on time, the better your credit score. Improving our credit score is like getting in shape, it takes time and practice. While it is never too late to begin down the path to be in great shape, it is helpful to understand that the path may take you six months or a year, or longer. Negative credit will eventually disappear out of your credit file. The good credit you have worked hard to produce will continue to be in your file and build a good healthy credit score for a long time."
Adds Ulzheimer, "There is a statute of limitations for most negative items. Most negative items can only stay on your credit report for seven years. If the consumer does absolutely nothing - meaning they just basically avoid using credit - then their scores are going to organically improve over time. As negative items get older, their value is going to diminish and the credit scores will start to improve."
Folks trying to recover after a bankruptcy will have a little more work to do as they try to reestablish credit. "Get a secured credit card," says Captan. "Another way is to get a personal loan from your bank, keeping in mind it has to be guaranteed by collateral or a car loan. Keep in mind though; it's going to cost you. Bankruptcy stays in your file for 10 years; however, its impact lessens over time when you pay your bills on time. Your score will definitely improve over time."
If your credit accounts are all up to date, there are further steps that need to be taken in order to further raise your score. "Pay off debt rather than moving it around," says Captan. What this means is that you should work toward aggressively paying off credit card debt instead of searching for the best balance transfer option.
"Keep revolving credit balances low," Captan adds. He explains, "The key point here is that you need to be aware that the FICO® scoring model uses a sliding scale. The lower a person's utilization rate on any one account, the better."
Captan also suggests keeping credit accounts open and using them at least once every six months. "Don't close unused credit cards as a short-term strategy to raise your score," he reveals. Closing your accounts may actually lower your credit score as a result of having less available credit. Captan explains, "What you are actually doing is reducing your overall available credit and therefore increasing your utilization rate. If you must close some of these accounts, choose the ones that you recently opened and that have the least credit history."
It is also important to be cautious about opening new accounts. "Open new accounts responsibly," suggests Captan. "Don't open a number of new credit cards that you don't need, just to increase your available credit."
Ulzheimer agrees. "In many cases we're seeing consumers taking advantage of in-store offers to save ten percent on their purchases by applying for a store credit card. What ends up happening is that consumers also end up with multiple credit inquiries that can damage their credit scores. What we always advise people to do is to just go ahead and pay the price for the merchandise. Don't use your credit report as a 10 percent off coupon. That's never a good thing."
Credit Repair Scams
The Federal Trade Commission cautions consumers against paying a company to raise your credit score for you, particularly when the company makes bold claims of being able to erase bad credit or makes other claims that seem too easy a fix. Captan agrees. "Today we have a lot of companies out there acting as credit repair companies claiming they have ways to improve credit scores," he says. "You want to be careful because there is nothing they can do for you that, in general, you can't do for yourself for free. You don't need to pay someone to improve your credit or to dispute any negative item in your file for you."
However, there are credible financial professionals who can assist you in getting your personal finances in order. They may also be able to help you take additional steps to try to raise your credit score. It is when aggressive claims of erasing legitimate credit are made that consumers should be wary.
Ulzheimer does not advocate the use of credit repair agencies. "Essentially what these agencies do is charge a fee to dispute negative information on behalf of the consumer," he says. "The consumer can write those letters themselves and save the cost of paying someone to do it for them. They are really nothing more than letter-writing services."
Worth the Effort
"Few of us know what this very important score means, yet not knowing and understanding this score can cost us thousands of dollars and force us to settle for less than what we really want," says Captan.
Ulzheimer adds that your credit score is not something you should ignore. "I don't know that you can ever truly ignore your credit score. It passively follows you essentially from the day your credit report is created - which usually happens between the ages of 18 and 22 - until you stop using credit. I think it makes good sense to spend a little bit of time at least understanding if our credit scores. I'm not saying that you need to run out and buy your credit score every month. I don't know if that's necessary - it's a little bit of overkill. But, if you're in the market to buy anything through a lender or if an insurance company is going to be pulling your credit report, I think it's a very good idea to do some proactive investigation to see what's on your credit report, verify that it's correct, and do some work to improve that score if possible."
Applying this expert advice in your own life can help you play a positive and proactive role in managing your credit, and that is ultimately determines what is on your credit report.