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11 steps to improve your credit score

First steps: Get your FICO score and a free credit report.

By Karen Datko Oct 6, 2009 11:12PM

This post comes from partner blog The Dough Roller:


Improving your FICO credit score has never been more important than it is now. Your credit score affects whether you are approved for a loan, the interest rate your pay, and even the cost of insurance.


Credit card companies now use credit scores and credit history to determine not only the interest rate that will apply to the account, but other terms such as the length of no-interest balance transfers. And your credit score can even impact whether you get a job.


In short, your credit score has a big impact on your finances. The good news is that you can begin to improve your credit score today with a few simple steps.

I've been monitoring my FICO credit score through myFICO.com, and I've noticed that my score has gone up about 15 points in the last month. So I thought it was a good time to review the simple steps we all can take to increase our credit scores.


(The definitive guide to credit scores is Liz Pulliam Weston's "Your Credit Score, Your Money & What's at Stake." Much of what I've learned about my own credit score comes from this book, and I highly recommend it.)


Get your FICO credit score. The first step is to know your credit score. The saying goes that you "can't improve what you can't measure," and that's never more true than with your finances. The good news is that you can get your FICO credit score for free directly from the creator of the FICO score. You do have to sign up for a 30-day trial of Credit Watch, but you can easily cancel the service before the trial ends if you want. I continued my subscription of Credit Watch specifically to monitor my score and have been happy with the service thus far.


Get a free copy of your credit report. Step 2 is to get a free copy of your credit report. By federal law, the three major credit-reporting agencies must provide each consumer with a free copy of their credit report every year. This is the starting point for improving your score. And remember, you can get your free copy at AnnualCreditReport.com.


Review your credit report for transactions that aren't yours (yes, identity theft). The first thing to do when reviewing your credit report is to make sure the identifying information about you is accurate and that your open accounts actually belong to you. It may be that your score has been knocked down because somebody is using your identity to apply for credit.


Review your credit report for errors. Even if all of the reported accounts belong to you, they may contain errors. For example, a creditor may have reported a delinquent payment (late payment or charge-off) that was in fact paid on time or repaid. If you paid a creditor in full after some missed payments, it's not unusual for the creditor to have failed to report your payment to the credit bureaus.


Review your inquiries for errors. When you apply for most types of credit, the creditor will pull your credit report as part of its decision whether to extend credit and on what terms. These inquiries are one factor in determining your credit score. The theory goes that if you have a lot of recent inquires to your credit report, you may be applying for credit to address a financial crisis. As a result, inquiries will lower your credit score. What you want to make sure is that you authorized each of the inquiries that you find in your credit report.


Dispute any errors you find. After carefully reviewing your credit report, your next step is to dispute any errors you find. Having successfully disputed errors in the past, I suggest taking two approaches. First, contact the creditor directly to dispute the error. Particularly if you still have an ongoing relationship with the creditor, they generally are willing to look into the issue. Second, dispute the error directly with the credit-reporting agency. By law they are required to investigate any errors you bring to their attention and respond to you within 30 days.


Filing a dispute with a credit bureau is much easier than it may seem, and each of the three major credit-reporting agencies has a section of its Web site (Experian, TransUnion and  Equifax) that will help you dispute an error online.


Pay your bills on time. After you've examined your credit report closely and disputed any errors, it's now time to turn our attention to money management. And the first rule of credit score health is to pay your bills on time. Even one late payment can significantly lower your credit score, and that's even more true the higher your score is to begin with. Note that most creditors will not report a late payment until it's 30 days past due. Still, being even one day late can result in penalty fees, increased interest rates, and even closed accounts.


Pay down your debt. This may fall into the "easier said than done" category, but it will help improve your credit score. Overall debt and the amount of available credit are important factors in calculating a FICO credit score. So paying down debt over time will help. As a starting point, avoid incurring any new revolving debt while you continue to make payments on the debt you have.


Do NOT close revolving accounts. It may seem counterintuitive, but closing credit card accounts, lines of credit, and other revolving debt can actually lower your credit score. One of the factors affecting your credit score is the amount of debt you have compared with the amount of available credit. The more available credit you have, all other things being equal, the higher your credit score. You can always cut up or put away credit cards to avoid using them, but don't close the accounts.


Don't max out a credit card or line of credit. Another factor in the credit score formula is whether you use most or all of the available credit in any given account. The theory is that if you max out an account, it may reflect some financial difficulties that could increase your risk of default. And this is true even if you pay off the account in full every month.


Apply for new credit only if you must. As noted earlier, inquiries to your credit report will lower your score. Every time you apply for a credit card, line of credit, or other loan, an inquiry is made to your credit report. To avoid these inquiries, apply for new credit only if you must.


Improving your credit score can have many positive effects on your finances. The simple steps described above will help you improve your score, and you may see results very quickly. Of course, if you are recovering from a financial meltdown, it will take time. But with patience and sound financial management, you should see your score start to improve.


If you have other tips on how to improve your FICO credit score, please share them in the comments below.


Related reading at The Dough Roller:

Published Aug. 21, 2009
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