Your credit report and credit score make huge differences in your life, and in your finances. If you have an excellent credit score, your home, car, insurance, and more will cost you thousands less because you are deemed “creditworthy.” If you have poor credit, you can be denied a home loan, refinance, and even auto insurance. Yet, most people have absolutely no idea what is necessary to improve their own credit score to accomplish their goals. If you follow these tips, you are sure to see your score improve.
1) Avoid Fee Credit Repair Services
Everyone has seen the credit repair signs on the side of the road and the advertisers online promising to fix your credit – for a fee. Although there may be reputable credit repair specialists somewhere, I have never met one, and I have dealt with many “credit repair specialists.” If you choose to enter into a contract with a “credit repair specialist” you will likely hear from them only once per month – when their service fee is due.
However, there is quality help available. Find a Realtor or Mortgage Broker who specializes in credit repair. The beauty of this arrangement is that your Realtor or Mortgage Broker will not earn their commission until you obtain the credit score necessary to purchase a home or obtain the refinancing terms you want. You will pay for results, not promises.
2) There’s No “Magic Bullet”
These same “credit repair specialists” will try to sell you on their own “magic bullet.” They will claim to have found a loophole in credit law that either: 1) Allows them to successfully dispute your collections and have them erased –or- 2) Dispute the manner in which the collections were filed to have them erased.
Creditors typically are in the position to loan money because they are very organized, have long memories, and are up to date on credit law. It is possible to dispute credit charges, and it is possible to have legitimate collections removed from your credit report. However, this has one BIG problem: The collections will reappear on your statement within a few months.
Your “credit repair specialist” may dispute your charge, at which time the creditor has 30 days to respond. If the creditor does not respond within 30 days, the collection is removed. However, as soon as the creditor’s reporting cycle again lands on your file, it WILL be reported, and it WILL reappear on your report. This is why you may find someone who claims to have had a good experience with a “credit repair specialist.” If you speak with the same customer 2-3 months later, they won’t have the same praise.
3) Borrow Money
This may seem counter-intuitive, but it’s absolutely essential. If you have bad credit, you will have to re-establish good credit in order for your score to go up. The only way to establish good credit is to borrow money. Borrowing does not necessarily mean putting yourself into debt. Do you need to purchase something from Best Buy? Put it on your Best Buy card. Do you buy gas on a regular basis? Apply for a new gas card and use it. Groceries? Use a credit card. The key is to maintain the same level of spending but to increase your use of credit.
4) Pay It Back On Time
Now that you’re borrowing money on a consistent basis, you have to pay it back in a timely fashion. If you don’t pay your bills on time, your score will go down – and fast. Timely, in this case, means no more than 30 days late. That’s the good news – just because your credit card company charges you a late fee doesn’t mean that they’ve reported you late to the bureaus. Make it a habit of paying ALL your bills on the same day of the month – that way you only have to go down the list once, and you’ll ensure that you avoid any late fees, and any 30-day lates.
5) Decrease Your Revolving Credit Balances
If you already have credit card debt, you need to take a hard look at how it’s distributed. Ideally, every card will be below 35% of its limit, but it will also help you quite a bit to keep them under 50%. You can accomplish this a number of ways. If you have money in the bank, pay the cards down – there’s not a savings account in the world that will pay out the interest your creditors charge you. If you don’t have the money to pay the balances down, ask your creditors to increase your limit – oftentimes, they will. Finally, if you have one card maxed out and another with a low balance, transfer some of the balance from the maxed out card onto the low balance card – or open a new account and transfer part of the balance there.
6) Open a New Revolving Line of Credit – Or Two
If you don’t have any revolving credit (credit cards), then it’s time to open two accounts. If you have credit cards in the collection, then you will probably have to get secured cards. A secured credit card will require that you deposit money with them in order for you to receive a credit card. This will feel like a debit card, but it’s not. If you deposit $300 with your bank to receive a $300 line of credit, you actually have two separate accounts. When you charge a balance to your line of credit, you will have to pay it back – the funds will not be deducted from the initial $300 you deposited. After you’ve opened your two lines of credit, use one for groceries and another for gas. Gas and groceries are two expenses that almost everyone has, and that almost no one will increase their spending on just because they are able to.
7) Buy a House
If you don’t already own a home, you are probably working on your credit in order to purchase your home. However, be very aware that your credit should skyrocket after you’ve made 4-5 mortgage payments on your new home. This means that you shouldn’t worry too much about your interest rate – you should worry more about getting the approval on your home. Avoid a pre-payment penalty on your loan, and plan on refinancing your higher interest loan for a much better monthly payment about one year after your purchase.
Credit scoring can seem very confusing and very intimidating. Unfortunately, there are a lot of uneducated professionals who claim to understand the scoring models but don’t. Find someone who specializes in credit repair and who has a vested interest in the success of your repair program. Follow these tips, give it some time, and watch your scores increase!