If you find yourself with a less-than-stellar credit rating, you are not alone. During the economic downturn that started in 2008, many people lost their jobs, homes and their high credit scores when they started delaying or missing payments.
This opened up a Pandora's box of credit card scammers promising to repair your credit score and get the creditors off your back. But be careful: there are legitimate, proven ways to improve your credit score without relying on grifters who will ultimately cause you even more grief.
1. Pay off your largest debts first
It may seem like a no-brainer, but few people do it. The best way to make a favorable impression on your credit score is to pay down your largest debts first. Much of your credit score is based on your revolving credit — that is, the amount you owe on your credit card vs. your line of credit. Try to keep your credit card balances below 30 percent of your available credit; even better if you can get it down to 10 percent.
"What scores look at is what we call utilization rate, which is simply your balance-to-limit ratio," explains Experian Director of Public Education Rod Griffin. "So, if you add up all of your balances on your credit cards, you add up all of the limits on your credit cards, and you divide those totals – the total balances by total limits, you get the utilization rate." The higher that rate, the worse it is for your credit scores. "What we found is people with the very best credit scores have utilization rates of less than 10%," Griffin reveals. "One of the numbers you'll hear out there is 30% - that's really a maximum. You'll hear people say, 'Never have more that a 30% balance on one credit card or in total of your available credit limits'. So, keep the balances as low as possible."
2. Make your credit card payments on time
Lenders hate it when you pay your bills late. Pay beyond the grace period (usually 10 days) and you will be assessed a late fee. Pay more than a month late and all three credit report services could be notified and your credit score will fall. However, when you establish a pattern of on-time bill payments, your credit history improves and your score goes up. The best way to ensure an on-time payment is to sign up for auto payments where money is deducted automatically from a checking account. Many creditors will also email bill reminders if requested.
3. Pay more than the minimum payment due
Do you know why the minimum payment due on your credit card each month is so low? It is because most of the money goes toward interest fees being charged by your lender, with only a small amount going toward your account balance. Therefore, a quicker way to lower your debt is to pay more than the minimum payment due. Over time, the extra payments add up, and you will notice your minimum due payment drop as well.
4. Check all of your credit reports for errors — then fix them
You would be surprised to learn how many mistakes can live on your credit report without you knowing it. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. It only takes one of the three credit reporting agencies — TransUnion, Equifax and Experian — to contain an erroneous or fraudulent piece of information (such as identity theft or mixing up your account with someone else) to ruin your credit. As Bankrate.com Chief Financial Analyst Greg McBride points out, "So often, people's credit scores are dragged down through something that they didn't even do. It's because erroneous information was reported. If you're checking your credit reports regularly, you're going to catch that."
Unfortunately, this is where the scammers are waiting to pounce. Avoid anyone who claims they can fix your poor credit by creating a new "credit identity" for you for a fee. It's not only a scam; it’s illegal, as well. If you believe there is a mistake on your credit report, you can resolve it with a single click using our credit correction service.
5. Don't close old credit accounts even when they're paid off
It seems like a good idea: you've paid off a lingering credit card debt, and now you want to rid yourself of the offensive card by cutting it up and closing the account. Not so fast. Keeping an account open and paid off shows future creditors you are reliable and a good credit risk. Also, closed accounts will show up on your credit report, and reflect poorly on your credit history. It is best just to leave them alone, especially when there is no annual fee involved.
Once you see you have an issue with your credit score, do not delay in trying to repair it.
If you would like to monitor your credit to prevent identity theft and see your credit reports and scores, check out our credit monitoring service.