11 Simple Steps You Can Do Yourself
If your credit scores are preventing you from getting the best interest rate on your mortgage loan or other types of loans – or even preventing you from getting credit - you can take some simple steps to bring them up.
#1 Pay down your debt
The first step toward increased credit scores is to pay down your debt. But sometimes that isn’t possible. What you CAN and should do immediately is stop using your cards for anything that isn’t vital to your well-being.
That means yes, buy a tank of gasoline to get to work if you have to. But no, don’t pull out the card and charge tickets to a concert or a $250 electronic toy. Don't use the card to go out to dinner when you could save $100 by cooking at home.
Use restraint and look at the long-range benefits of doing without a few things.
#2 Transfer balances to pay less interest
Next is to look at the credit cards available to you, and transfer your balances to the card with the lowest interest rate - But only if you can do so without bringing the balance on any one card to over 30% of your available credit. This is important, so be careful.
If you've been faithfully paying your payments each month and your rates are higher than you'd like, contact each credit card issuer and ask for a reduction. They won't all agree, but some will – especially if it sounds like they're about to lose your business.
Once you’ve moved your balances to a card with lower interest rates, the minimum you're required to pay each month will go down, but don't take advantage of that. Continue paying the same payment as before so your balance will drop faster. Then try to add a little more. Even an extra $10 per month against your balance due will add up in time.
Remember, every dollar paid is a dollar you’ll never pay interest on again, so as your balance goes down, the amount of your payment going to interest will also go down and your unpaid balance will decrease even faster.
#3 Avoid using more than 30% of your available credit
Part of your score is based on the amount of credit you're using in relation to the amount available to you. Work hard to stay below 30% - below 20% is even better.
One misconception is that paying your balance in full each month means you can use 100% of your available credit without an adverse effect on your credit scores. That isn't true. Card companies report the balance at the end of the statement period – and if it shows that you've used all your credit on any one card, your score will go down.
People who use their cards for business travel and are reimbursed by their employers often get caught with this one, so be careful. If you need to use a credit card for your employer's benefit, either ask for a company credit card or get your own credit line increased – or use multiple cards.
By the way, if you use a card for your own business, be sure not to charge personal items on that card. If the card is used only for business and you sometimes carry a balance, you should be able to deduct the interest at tax time. (Check with your tax preparer for details.)
#4 Ask for a credit line increase
If you’re in good standing with all your credit cards, contact each of them and ask for a larger credit line. You’re not going to use it, however, except to transfer balances as above. The reason you want higher credit limits is to show that you’re using a smaller percentage of the credit available to you.
#5 Keep all your accounts open
Do NOT close open accounts. You definitely shouldn’t open any new accounts or even apply for new accounts when you’re trying to build your credit score, but if you close accounts you now have, you will actually lower your score.
If you get a letter threatening to close your account for non-use, use it and then pay the balance when the statement arrives - so you don't have to pay interest.
The reason you should keep all accounts open is because your debt load is measured against the credit you have available to you. When you close an account, that credit is not available, so your debt ratio goes up, making your account balances seem higher.
For instance, if you have 4 credit cards, each with a limit of $5,000, and you have balances of $2,000 and $4,000 on 2 of the cards, and zero balance on the other two, you are using only $6,000 of $20,000 available, or 30%. If you close the two unused accounts, you’re now using $6,000 of $10,000 – or 60% of your available credit.
Of course, using $4,000 of a $5,000 limit hurts you too. So the best thing would be to take the debt and spread it between the 4 cards – keeping each at 30% or less. I don't know why that matters, but it does.
If your credit is so damaged that you have no credit cards...
You can start over and build your credit through use of a secured credit card. You simply deposit a set amount of money in a savings account – which becomes security for credit issued to you.
Use the card – sparingly – and pay the balance in full each month. Since the card issuers do report this activity to the credit bureaus, your credit will slowly begin to build.
Once you have re-established credit, you can apply for and get a "regular" credit card and your savings will be returned to you with interest.
#6 Avoid Retail Credit Inquiries
You’ve probably heard that inquiries on your credit lower your score. This is true if the inquiries come from retailers, but not if you check your own score. Mass pre-approval inquiries (soft inquiries) are also ignored when your credit is calculated.
While you’re building your credit, avoid shopping, except for window shopping. Don’t allow any salesperson to check your credit. Remember, you’re working on building your credit scores, so you’re not going to buy anything on credit right now anyway.
Retailer inquiries lower your score by only about 5 points, so don’t be careless, but don’t panic if there’s already been an inquiry.
#7 Open a Savings Account
If you don’t have one, open a savings account and begin making regular deposits. Even if they’re small, owning a savings account gives you points when the FICO score is determined.
#8 Work to build the balances in both checking and savings accounts
When you apply for a home loan, the mortgage company will want to see that you have sufficient funds to pay:
- The down payment
- The closing costs
- At least a couple months' payments
So work on making sure that those funds are available to you. Lenders frown on borrowed down payment money, by the way, so don't put the down payment on your credit card.
Traditionally, gift funds have been acceptable as a source of down payment funds. Check to see if your particular lender will allow this. Then, if you get a gift, make sure it is well documented and that the person who made the gift can show that they had sufficient funds on hand.
If you are selling personal possessions to gather down payment funds, be absolutely sure to document the sale. Keep a copy of the bill of sale with the buyer's name, address, phone number, and signature.
I had one instance in which a buyer sold a motor home to a relative, intending to buy it back after the purchase was completed. The lender insisted on seeing that the buyer had titled and licensed the motor home in her own name before allowing those funds to be used - so the whole process cost a bit more than anticipated.
#9 Keep an Eye on Your Own Credit Report
Even if you aren't considering a purchase right now, you should get your credit report – with FICO scores - and read it carefully. This will alert you to a need for improvement, but there are two more very important reasons for monitoring your own credit.
- First, your report could contain mistakes or outdated information.
Your report could include accounts you’ve never had, accounts that have been paid in full, and old information that should have been removed. All of these can hurt your credit scores.
Certain kinds of information should be removed after 7 years – this includes lawsuits, judgments, paid tax liens, collections, late payments, and even child support. However, it doesn't always happen, so you need to check. If your report carries that outdated information, it is still hurting you, and you need to take steps to have it removed.
Next, consider how easy it is to make a data entry error. One slight slip and a 7 becomes an 8. When such an error occurs when entering a Social Security number, it means that someone else's negative information could be entered under your Social Security number and land on your credit report. You might be shocked to learn just how often this happens.
If it happens to you, you'll need to contact the Credit Bureau with the mistake and get it corrected – and that will take a little time. Better to do it when it first happens than wait until you need to use your credit.
Correcting errors and removing outdated information can have an immediate and positive impact on your credit score. And since that can have a huge impact on the interest rates you pay, it’s well worth your time to get it corrected.
You simply fill out a request for reinvestigation, or write a letter to the credit reporting agency that listed the incorrect information. As carefully and accurately as possible, list every inaccurate piece of data and describe why it is incorrect. Do the same with each outdated item.
- Second, your credit report will alert you to signs of identity theft.
Identity theft is big business now – and it's apt to become even bigger considering the turmoil in the current economy. Monitoring each entry on credit card bills and bank statements is a smart move – but that step isn't enough. You need to read your credit report as well.
When you get your report, check your Social Security number, your name, your spouse's name, address, phone number, and information concerning your occupation. Errors here could be honest mistakes, or they could signal identity theft.
One way thieves can profit from your information is to file a change of address on an account you haven't been using. You aren't suspicious when you don't get a statement, because as far as you know, you don't have a balance due. Thus they can run up huge bills before they decide to quit paying – leaving you with the scars.
They can also open new accounts using your name and Social Security number – but with a different address. Check your report for accounts you've never heard of, or "hard" inquiries from companies that have no reason to check your credit.
Your credit report could show that "you" have been shopping a thousand miles from home!
If you find evidence of identity theft on your report, you must file a formal report, because you’ll need a copy of the report when you contact the credit bureaus and respond to debt collectors. Your police report should include all the fraudulent accounts you identify when examining your credit report.
- Your Local Police Department
- FTC 800-438-4338 or 800-ID THEFT
Then contact one of the credit bureaus and get started through the process of getting the fraudulent accounts removed from your name. The good news here is that you only need to contact one of them and they will notify the others.
Ask them to contact your creditors and let them know that the accounts in question are fraudulent. Meanwhile, begin keeping a detailed log of every action you take and every person you speak with while you work to regain your credit.
Contact each creditor and ask them to close the accounts in question.
Be sure to check your next months' credit report – just in case fraudulent activity has taken place between the time the last report was issued and the time when you flagged your account for suspicious activity.
You’ll probably have to deal with debt collectors. Here’s how to handle them:
- Get the collector’s name, company name, address, and phone number – noted in your detailed log. Inform the caller that you are recording this information, along with the date and time.
- Inform the collection agency that you are a victim of Identity Theft
- Provide the FTC uniform fraud affidavit
- Ask for the name and number of the credit issuer they’re representing
- Send the debt collector a letter, stating that you do not owe this debt and that the account is closed.
- Request in writing that the account be flagged as fraudulent and ask that it be removed from your credit report.
All of this will take time, so keep a close watch on your credit report. The sooner you put a stop to the fraudulent activity, the less damage a thief can do.
This is why it's a good idea to sign up for a service that alerts you to any and all activity on your credit report, or to get monthly reports and really read them each time they arrive.
#10 Think Twice About Credit Counseling
If you've gotten behind and need to work with your creditors, you may be tempted to just hand the problem over to a credit counseling agency to solve. That may or may not be a good idea.
At one time using a credit counselor did affect your score, but a study conducted 3 years ago showed that people using credit counseling did not default on their debts any more than other people. Thus the most current FICO formula ignores credit counseling altogether.
BUT – credit counseling can still be risky. Sometimes counseling agencies make payments late or pay lesser amounts – and these mistakes will affect your score.
In addition, many credit counselors charge money to do things you can do yourself.
#11 Be Wary of Credit Repair Agencies
Any agency that claims to be able to remove all negative information from your credit report is lying to you! These agencies are good at removing just one thing – money from your wallet.
The truth is, true information cannot be removed. As you saw above, outdated information and errors can be removed – but you can do that yourself. There's no need to pay someone else several hundred dollars to do it for you.
A Few Last Words About Credit Reports and a free resource to help you
You may have heard that each of the "Big 3" is required to give you a copy of your report for free once each year. This is true. However, the report they give you will not have your credit scores.
These free reports have value to you because you can read them and check for wrong addresses, old information, accounts that should have been removed, accounts that aren't yours, etc.
But they won't let you know if you need to take steps to increase your scores – and they won't alert you to any signs of identity theft that might crop up the day after they issue your annual report. Think about it: 365 days between credit reports gives a thief a lot of time during which he or she can destroy your credit!