Having a higher credit score can save you money by qualifying you for a lower rate of interest on a loan. The lower the interest rate you pay, the less money you pay back on the loan. A low credit score can actually prevent you from improving your financial situation. Even though poor money decisions, which you have made in the past, can remain on your credit report for years, there are ways you can start improving your credit score almost immediately.
Step 1
Cancel any non-essential credit cards. Limit the number of credit accounts you open. Having too many credit card accounts can bring down your score. In addition, be selective in the types of credit for which you apply. For instance, some credit scoring models do not view loans from finance companies favorably when determining a consumer's level of risk for repaying credit.
Step 2
Pay down credit card accounts that have high balances remaining or balances that are close to the credit limit. You can keep your credit accounts open, but avoid maxing them out. How much money you owe in relation to how much credit you have available accounts for 30 percent of your credit score. For that reason, being close to or exceeding your credit limits can reflect negatively on your credit score. According to the vice president of global scoring solutions for FICO, a system that generates credit scores, one of the best ways you can improve your credit rating is to pay down balances (see Reference 2). However, credit scoring models still want to see some activity, therefore, it is not necessary, or even advisable, to keep your credit cards at zero balances.
Step 3
Make your payments on time. Your payment history on credit card accounts, home mortgages, auto loans and other installment loans account for about 35 percent of your overall credit score. Late payments and past due accounts can lower your credit score by as many as 100 points. How much money is past due on an account and for how long the account has been past due are other factors that can drop your credit score even more.
Step 4
Keep existing credit card accounts open even if the card issuer raises the interest rate. This is particularly important if you have had a long credit history with that creditor. Closed accounts are eventually dropped from your credit report. The thing is you get points for establishing a positive payment history with a credit card company over time. If you don't like the new interest rate, use that card in moderation.
Step 5
Prevent becoming a victim of identity theft or credit card fraud. Identity theft can do a lot of damage to your credit score. Never provide your social security number to anyone over the telephone or in response to an email solicitation no matter how legitimate the request may appear. Another way to prevent identity theft is to shred all paperwork containing personal or financial information before throwing it in the trash.
Tips and Warnings
- Always look over your credit card statements carefully each month for errors or unfamiliar purchases. If you notice any inaccuracies, send a letter by certified mail to the creditor explaining why you are disputing a certain item. Having a credit card balance can actually help you to recover from a bad credit history. The key is to make small purchases so that you can pay then off immediately. Avoid falling behind on paying any of your bills. It won't matter that you always pay your mortgage loan on time if you let some of your other bills slide. Even nonpayment of small bills can eventually show up on your credit report. If you can't manage paying all your bills, contact the individual creditors to set up payment arrangements.
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