How to Fix Your Credit

Credit: khunaspix

I know a lot of good people with not-so-good credit. Most people who ask me how to improve their credit are not repeat offenders. They had an emergency, they decided to take a big trip, or they got a little carried away with their first credit cards. Still, some people have serious, recurring credit problems and are headed in the wrong direction. In this post, I'd like to share five tips on how you can right the ship and start improving your credit once and for all.

1. We’ll call this “1(a),” as in order to have credit at all (good or bad), you need to have used credit. If you don’t have a credit card, get one. The sooner you start wisely using a credit card and paying it off every month, the longer your credit history will be. The longer your credit history is good, the higher your credit score, which will help you get the most favorable terms when it comes time to buy that house or car. If you’re solely focused on trying to improve your credit score, you might even consider using your oldest card (the one you’ve had the longest) over your newer ones.
2. Pay off what you owe every month! If you have a mortgage payment or a car loan payment due, at least pay what is due. If you have a credit card bill, don’t just pay the minimum - pay it all off! If you can’t pay it all off, I understand, but you really need to spend less next month so you can pay it off then. Building up credit card debt doesn’t usually end well, trust me.
3. Even if you can comfortably pay off your credit card every month, try to pay it off before it gets near its limit, even if that means making payments several times a month. Some people have low limits (and some people want low limits, which isn’t a bad thing), but believe it or not, letting your credit card bill rise to near its maximum allowable limit can have negative consequences for your credit score.
4. Long-term debt can help. Associated with a long, good credit history is often the steady reduction of student loans, car loans, mortgages, and home equity lines of credit. Steady, recurring payments (with a little extra principal every now and then) are really one of the best things you can do to improve your credit score. Now I’m not suggesting you go take out a huge thirty-year note on a line of credit in the name of boosting your credit score, but I am saying that by steadily paying your long-term debts you are literally showing other lenders that you would likely be a good steward of any funds they lend you in the future.
5. I’ve mentioned this in previous posts (The Best Home Loan You Could Possibly Hope For and TARGETed to cite a few), but you really should check your credit reports from time to time at annualcreditreport.com. You can check your credit once a year with all three credit bureaus for free if you like, but I also like the strategy of people who check their reports with a different bureau each year, and they just rotate to make the task seem less daunting (unless they find an error and then they check with all three bureaus). I would suggest that you check your credit reports at least every several years, but definitely before you buy a car or take on a mortgage. When you get your credit report, you’re looking for errors, to make sure all the types and forms of credit you are using are listed, and to make sure the limits on each type of credit are up-to-date. While we’re not usually talking massive improvements to your credit score, correcting the fact that you made your October 2013 payment on time and that your Visa actually has a $10,000 limit instead of your initial $5,000 limit can only help. If you find an error, here’s a helpful site listing tips and contact information for the three credit bureaus provided by the Consumer Financial Protection Bureau.

Your credit score can range from around 350 to 850, and anything above a 720 or so is usually considered pretty good. Now just like Rome, your credit score cannot be built (or improved) in a day, but unlike Rome, it can be destroyed pretty quickly. Credit reports usually go back about seven years, so unless you find and correct a serious error or two on your credit report, there really aren’t any “silver bullets” (contrary to what some billboards and late-night commercials will try to tell you). If you’ve done a good job handling your debts and you have a great credit score, keep up the good work. If you’ve had some struggles with credit cards and being able to make payments on all of your debts, I’d encourage you to implement these tips and simply do better going forward. As they say, time heals wounds...and credit scores!

 

-Tom