Improve Your Credit by Following These Steps...
Five Steps to Better Credit
- Correct blatant mistakes. Your credit score is only as good as what shows up in your credit report. Review your
reports from all three credit bureaus for accuracy once a year as well as several months before applying for a loan.
Changing a mistake on your report - such as a payment that is wrongly labeled as late -- can take 30 days to three
months, sometimes longer.
- Pay your bills on time. This is always a good practice, and it's especially critical that you make prompt payments
close to the time you need a loan. That's because a late or missed payment in the last few months is likely to lower
your score much more than an isolated late payment five years ago.
- Reduce your credit card balances. A heavily weighted factor in your FICO score is how much money you owe on
your credit cards relative to your total credit limit. Generally, it's good to keep your balances at or below 25 percent
of your credit card limit, said Jeanne Kelly, founder of The Kelly Group in Brookfield, Conn., which helps clients improve
their credit scores.
- Pay off debt rather than moving it around. Since the ratio of your credit card balance to your credit limit is key,
closing out an account and transferring the balance simply means you increase that ratio, which is likely to lower your
score. In other words, say you owe a total of $2,000 on four credit cards, each of which has a $2,000 limit. Your
total credit limit is $8,000, of which your total balance ($2,000) accounts for 25 percent. If you transfer all your
balances to two cards and cancel the other two, your total credit limit is reduced to $4,000, and your $2,000 balance
now accounts for 50 percent of that limit.
- Don't close unused credit card accounts near loan time. If you have several credit card accounts but are only using
a few of them, you'll only raise your balance-to-limit ratio if you close the unused ones. You also shouldn't open
new accounts when applying for a loan if possible. If you have a short credit history or very few accounts, opening
a new credit line may lower your score since you don't have a proven track record, said Jan Davis, an executive vice
president at TransUnion. What's more, a new account will lower the average age of your accounts, another
factor in your FICO score. |
