There are more than 30 million people in the United States with credit
blemishes severe enough (and credit scores under 620) to make obtaining loans
and credit cards with reasonable terms difficult.
Or maybe your credit is OK, but you'd like to make it better. After all, the
better your credit, the lower the interest rates you can secure on mortgages,
car loans and credit cards.
Know the Score
In order to improve your credit score, it's important to
know where you stand currently. Despite all the media attention given to free
credit reports, you still have to pay to find out your credit score, the
three-digit number ranging from 300 to 850 that is the key to your borrowing
costs. You can obtain your FICO credit scores, the ones lenders use, from MyFico.com.
Now you're ready to take the seven steps to speedy credit repair:
1) Pay Down Your Credit Cards. Paying off your installment
loans (mortgage, auto, student, etc.) can help your score, but typically not as
dramatically as paying down -- or paying off -- revolving accounts like credit
cards.
The credit-scoring formulas like to see a nice, big gap between the amount of
credit you're using and your available credit limits. Getting your balances
below 30% of the credit limit on each card can really help.
While most debt gurus recommend paying off the highest-rate card first, a
better strategy here is to pay down the cards that are closest to their limits.
2) Use Your Cards Lightly. Racking up big balances can hurt
your score, regardless of whether you pay your bill in full each month.
What's typically reported to the credit bureaus, and thus calculated into
your score, is the balance reported on your last statement. (That doesn't mean
paying off your balances each month isn't financially smart -- it is -- just
that the credit score doesn't care.)
You typically can increase your score by limiting your charges to 30% or less
of a card's limit. If you're having trouble keeping track, consider using a
check register to track your spending, logging into your account frequently at
the issuer's Web site, or using personal finance software like Microsoft
Money or Quicken, which can download your transactions and balances
automatically.
3) Check Your Limits. Your score might be artificially
depressed if your lender is showing a lower limit than you've actually got. Most
credit-card issuers will quickly update this information if you ask.
If your issuer makes it a policy not to report consumers' limits,
however -- as is the usual case with American Express cards and those issued by
Capital One -- the bureaus typically use your highest balance as a proxy for
your credit limit.
You may see the problem here: If you consistently charge the same amount each
month -- say $2,000 to $2,500 -- it may look to the credit-scoring formula like
you're regularly maxing out that card.
You could go on a wild spending spree to raise the limit, but a more sober
solution would simply be to pay your balance down or off before your statement
period closes. Check your last statement to see which day of the month that
typically is, then go to the issuer's Web site about a week in advance of
closing and pay off what you owe. It won't raise your reported limit, but it
will widen the gap between that limit and your closing balance, which should
boost your score.
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