One of the first and most important tasks most everybody should tackle as an adult is establishing and improving their credit score. That’s because people with great credit enjoy lower loan rates that can result in serious monetary savings.
It’s no secret that mortgage rates can vary by 1.5 percentage points or more between the highest and lowest credit tier.
To put that in perspective, if you borrow $200,000 and get a 30-year mortgage at 5%, you’ll pay $176,011 in interest over the life of the loan. On the other hand, if you have to pay 6.5%, you’ll end up paying an additional $66,994 over the same time period.
So how can you improve your credit score? Well, I think I have more than a few ideas, both directly and indirectly. Here they are in no particular order:
- Get a credit card and establish a credit history.
- Better yet, get two credit cards. Then use them responsibly.
- If you have had problems in the past, reestablish your credit history ASAP.
- Understand how people of modest means have learned to stay out of debt.
- Never be late paying your mortgage.
- Don’t consolidate your credit card accounts.
- Resist the urge to cut up your old credit cards.
- Cut up your old credit cards, but don’t close the accounts.
- Raise your credit limit; many times the credit card company will do it if you just ask them.
- Emulate your next door millionaire neighbor.
- Take advantage of the power of payment reminders; consider automatic payments.
- Avoid bouncing checks.
- Don’t be a deadbeat.
- If you do bounce a check, pay it off before your debt is reported to a collection agency.
- If you can help it, never apply for bankruptcy.
- Don’t emulate your next door neighbor.
- Understand the difference between a want and a need.
- Don’t apply for a new credit card.
- Use your credit cards for everything you can, then pay them off in full before the statement date.
- Be patient.
- Develop a healthy disdain for paying interest.
- Get a copy of your credit report and go over it with a fine-toothed comb.
- If you find any inaccuracies on your credit report, vigorously dispute them.
- Don’t be greedy.
- Ensure your debt-to-income ratio stays as low as possible.
- Don’t open a lot of new credit accounts too quickly.
- Understand that the power of compound interest is a double-edged sword.
- If you have missed payments, pay them off and then keep them current for evermore.
- Motivate yourself by realizing that the odds of buying your own home without a loan are slim.
- Spread your debt out across multiple credit cards, rather than piling it all on one.
- Show lenders that you can be responsible with both revolving (credit cards) and installment (e.g., personal loans, etc.) credit.
- Stop spending more than you earn.
- Don’t request a lower credit limit.
- If you have a delinquent account, ask your creditor if they will re-age your account.
- Understand that a collection account stays on your credit report for seven years — even if you pay it off.
- Pay your bills on time.
- Immediately challenge credit card companies that claim you’ve made a late payment.
- Never exceed your credit limit.
- Respect the power of credit cards.
- Build a long and sustained history of responsible borrowing.
Photo Credit: cafecredit.com
Len,
Could you clarify point 19 for me? I thought you wanted a statement balance that would show a 1-5% credit utilization on your credit reports, then payoff the balance between the statement date and the due date to avoid interest. Is this not the case?
The theory behind number 19 is if you paid the card off before the statement date, then you would ensure a minimum credit utilization rate because you’d clear your purchases before they were officially reported.
I was definitely wrong on this one. Here I was thinking you only got rewards dollars on the statement balance of a CC and not the actual spending, so was trying to keep a happy medium.
Now that I know this (and verified it other places, of course) I’ll be pummeling my Discover Card most vigorously.
I can’t believe i’m also doing this now. You know, just two weeks ago i was desperately in search of a hacker or anyone at all that could save my credit from the disaster it was in. Then i stumbled upon a discussion group on the internet and this hacker was spoken of by many, some in this kind of manner as i’m writing here. I emailed him through the email and the rest is history. My whole life changed and my marriage, saved. My credit scores are up now and my late payments erased. You know what to do, if you’re having any problem with your credit. Tell him i referred you
You saying the truth Miss/Mrs Webster. He’s really one of a kind. Saved me from being homeless.
I emailed a freelance credit expert for my credit repair. Can’t thank him enough. My credit issues are all fixed including the eviction I had was removed.
All of the credit scores are proprietary, so no one knows with certainty, but at least one study has suggested that having a 5-9% utilization rate is optimal.
First of all, not all card issuers report to bureaus synchronous with your due date. Call and ask. Second, there are plenty of 0% interest cards out there. So between 1 and 2, you can carry small amounts of debt and/or time payments around the reporting date to maximize your score.
I don’t think it’s a huge increase, but at the end of the day, carrying some reported debt makes you a more attractive client for a credit card issuer than someone with 0% utilization. They only make swipe fees on 0% clients. Hence, a higher credit score.
Put yourself in the bank’s shoes and the reasoning becomes more clear.
Len, I like your advice about emulating how someone of modest means stays out of debt! Not only will that improve your credit score it will allow you to build real wealth. I teach a Personal Finance Course to Middle School Students and am always shocked at the lack of financial literacy skills of my students. Credit is one topic I cover and we go over several scenarios showing the total cost of financing with excellent, good, and bad credit scores. One issue we talk about in class is delayed gratification or the lack there of and the financial cost of financing things we want rather than waiting until we have the cash.
Happy Holidays Len!
Thanks, Paul. Classes like the one teach are sorely needed today. I think a personal finance management class should be required to earn a high school diploma.
Merry Christmas to you!
I’m currently using step 19 as a friend told me this was a good way to increase my credit score. I buy everything on my credit card for points and then just pay it off before it’s due.
I didn’t realise there were so many other ways to increase my credit score!
Thanks for sharing.
Len,
Nearly 5 years ago, when I was 20 (and under my mom’s health insurance), the insurance apparently didn’t pay all of a medical bill and it ended up going to collection. I found out about this last year (I am now 25) and paid the amount. It was approximately $300. Since I have actually been actively managing my money and living on my own, I have had an excellent credit record – pay everything on time, have had one car loan and a credit card, and now have a home mortgage loan. Is there nothing I can do to remove the small collection amount from my credit report? It is so frustrating that I didn’t even know about the collection and that it is only a small amount but negatively affecting my credit score.
Sadly, Dani, I don’t believe there is much you can do. The best advice I know of is to check the info about the collection account and check for any errors — no matter how insignificant. According to Credit.com:
“If any of the information reported about the collection account to the credit reporting agencies is inaccurate or incomplete, you have the right to dispute that account with the credit reporting agencies. They must verify the information with the source. If the source doesn’t confirm the information within thirty days, the credit reporting agency must remove it. Some agencies will not bother to verify older paid collection accounts.”
More good news … time is your friend. Over time, the impact of the negative report on your credit score diminishes. So even though it may stay on your record for seven years, it is less of an impact in year two than year one — and even less in year three than year two.
Hope that helps.
Thank you! Enjoying reading your blog and appreciate the feedback!
Nice and informative article. This article helps me a lot. Thank you.
i don’t usually buy into an idea until i give it a trial. all of my life my credit profile was in poor condition and i had a lot of problems with creditors. i was deprived of many things i needed most in my life. i almost ran into bankruptcy. i have lost a lot. but len, your tips helped me increase my score from 435 to 802! now i’m able to to do so many more things for myself and my family. thank you.
Glad to hear it, Andrea!
Thanks. You tips went a long way toward repairing my credit report! My credit score increased to 790 and I erased all negative items on my credit report within 2 weeks.
Wow! That’s great news, David!
It can be done! My credit score was 570 and i have evictions on my report. Then i increase my credit score to 815.
My husband and I recently sold a home and loan is paid off. We looked at our credit reports before getting preapproved to start looking for another home. We found that the payment for our home loan had been reported late for 24 consecutive months. It looks like a partial payment was applied to the principal on the loan instead of the payment amount due and through the payment off. I contacted the loan officer, due to our closeness he told me secretly that the quickest way to get it cleared up was to looked for a credit expert I told him I don’t know anyone who could help me out then he introduced me to a guy who’s a former Experian worker. I contacted him via email. I explained everything to him and he assured me he would help me get my credit fixed after we got an agreement. To my great surprise every debt on our credit was marked as paid, the 24 consecutive late payment had been corrected to on time payment. We applied for a home and we were approved. My question is: If the loan officer didn’t confide to us we wouldn’t have got our credit fixed, which i’m pretty sure many Americans are currently in this situation!
Warning! I worked for over 16 months paying off debts and watching my score slowly rise. It was time to buy my first home and I needed help to get my scores a bit higher. I made an appointment with my banker and he made the following suggestions and I went along with his advise. We opened a secured major cc and he instructed me to use the card then pay it off completely each month. I was also approved for a small personal loan and was told to pay it off over a few months and all would raise my score drastically. WRONG! My score dropped 109 points in 1 month for opening an account and charging up to the limit! I’m absolutely deviated and worked my a#* off for NOTHING!
My score dropped 109 points in 1 month for opening an account and charging up to the limit!
There was your problem, Benjamin. If you open up a credit card or line of credit, your credit score goes up because you have more available credit, which is a factor in determining your credit score. But if you “charge it to the limit” then you’ve not only lowered your available credit — you’ve gone deeper into debt. That’s a double whammy to your score!
I have a credit card that went to collections. I paid it off over time in full even after they offered me to pay at lower amount interest. On my credit report it shows negatively, I did all I could to get it off but shows the failure to pay originally I paid it in full and feeling like Im stuck with the negativity on my report despite my efforts to pay all that I owed. All loans I applied for was turned down, to whole situation got worse when I wanted to buy a house and I was still not approved all due to my credit history. I was so furious!
I have a credit card that went to collections. I paid it off over time in full even after they offered me to pay at lower amount interest. On my credit report it shows negatively, I did all I could to get it off but shows the failure to pay originally I paid it in full and feeling like Im stuck with the negativity on my report despite my efforts to pay all that I owed. All loans I applied for was turned down, to whole situation got worse when I wanted to buy a house and I was still not approved all due to my credit history. I was so furious!
There’s a saying that “If you are depressed,you are living in the past. If you are anxious, you are living in the future. And if you’re at peace, you are living in the present”…Live in the present(in the now). Do not be afraid or embarrassed that you have a bad credit score — only be embarrassed to continue living with your present score.