How to Improve Credit Scores...

I remember the first time I saw my credit scores.  My wife and I received our letters at the same time. Her score was over 700 and my score was only 430. It took her about 15 minutes to stop laughing and get off the floor. Right then and there I made up my mind to learn how to improve my credit scores.

You may have experienced a similar situation. Needless to say, since then my credit scores have soared. In the process, there's a lot of information I gained along the way about how to improve credit scores.

First of all, your credit score is a number that lenders use to summarize your credit risk. They use it to make a best guess at whether you will pay them back or not.

How is my credit score calculated and who calculates it?

Although there are different types of credit scores, Fair Isaac Corporation myfico.com is the company that calculates your FICO credit scores.

They use the information from your Experian Transunion Equifax, credit reports.

Your credit information is organized into 5 categories and then used to calculate your FICO credit scores:

1. Your Payment History

Your payment history is probably your biggest chance to improve credit scores. Obviously you want to make payments on time to improve your credit scores.

But if you already have late payments on your credit report, don't assume the information is accurate. You should dispute the information with the credit reporting agencies and make them prove it.

You may be surprised to learn that lenders will sometimes post payments 3 to 7 days after they receive your payment. This can cause a 30 day late payment on your credit report, when actually it may have only been 27 days late.

Believe it or not, over 70% of credit reports have some type of errors.

2. How Much Money You Owe

The FICO credit scoring system looks at how much money you owe compared to your credit limits. For example, if your credit card limit is $1,000 and you have a $700 balance, it calculates a debt ratio of 70%.

To improve your score you should try to keep your balance to no more than 20% to 30% of your credit limit for each account.

3. Length of Your Credit History

Generally, a longer credit history will increase your credit scores. But even with a short history you can still get a higher score if the rest of the information on your credit report looks good.

4. New Credit

When you apply for new credit and a lender pulls your credit report, your credit score may drop by about 5 points. However, the FICO credit scoring model does take into consideration the difference between "shopping" for the best rates for a loan versus trying to open multiple accounts.

So if you make multiple applications within a few days, your scores may not drop as much in comparison to applying for several loans and then waiting a month and apply for more loans.

Inquiries can remain on your credit reports for two years, but the FICO scoring model only considers inquiries made during the last 12 months.

Also, it only considers inquiries based upon your requests for new credit. This is an area you should carefully review. Many times there are inquiries that you did not generate.

So don't assume the inquiries are accurate. You should dispute them and make the credit reporting agency prove their accuracy.

After you've corrected as much negative history as you can, you can improve your scores further by getting new credit. If your FICO credit scores are too low, you can get a secured credit card. Once you get new credit, then make timely payments.

5. Type of Credit

The FICO credit scoring system considers your mix of credit cards, retailer accounts, installment loans, finance company accounts, and mortgage loans.

If you have both, revolving accounts (e.g. credit cards or lines of credit,) and installment loans (e.g. auto loans), you may get a higher score than if you only have one type of credit account.

Credit score improvement tips:

  • Remove as much inaccurate negative credit information from your credit report as possible.
  • Negotiate with the remaining creditors to pay off your balances. Get their written agreement to remove any negative information as a part of the deal.
  • Apply for new credit with creditors known to help re-establish credit. If necessary, get a secured credit card.
  • Use your credit card for necessary purchases, and make timely payments.

Over time, your credit scores should improve.

But remember, your goal is not to learn how to improve credit scores to get into more debt. Your goal is to learn how to improve credit scores to get out of debt faster.

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