Monday, July 20, 2009

6 Steps to a Higher Credit Score

Contrary to what you might see in some advertisements, there is no magic way to raise your credit score. That doesn't mean you can't improve your score with good old-fashioned attention and effort. All you need to do is see to it that errors are removed, deal with any disputes with your creditors that are resulting in a reduction in your score and -- for most people -- improve your payment history and lower your debt.

Easier said than done, right? Here I give you the six steps to a higher credit score. Your score won't jump overnight, but you should see steady improvement over time if you follow my advice.

1st: Read Your Credit Report

The first step to a higher credit score is to order your credit report, which is the roadmap used to calculate that score. It's like a snapshot in time of your financial and personal life on a particular day. It should factually reflect your outstanding credit, your payment history, the status of your credit accounts, and any information that can be found in public records.

You can request one by visiting or calling one of the three main credit reporting agencies: Equifax, Experian, and TransUnion. You are entitled to one free report a year.

2nd: Deal with Credit Report Agency Errors

When you get your report, first, check your personal information (name, addresses, job history), to make sure your file hasn't been merged with someone else. Then check the accounts listed. You may find one listed more than once or one that is not yours included in the report.

If you discover any mistakes, send a written letter to the credit bureau listing what is wrong with the information on the credit report and how you think it should be corrected. The agency has 30 days to respond to your letter and indicate how it will handle your challenges to the report. If the error was simple, that may be all you need to do to take care of it.

3rd: Disputing Creditors' Claims

Your report may include errors that aren't so easy to fix. For example, some consumers walk away when they are in billing disputes with creditors when they are confident they are in the right. But creditors may report a lack of payment to an agency. Such negatives can result in a "no" decision on an application for future credit, even if the negative mark is not a true reflection of your credit history.

To correct those kinds of inaccuracies, you may need to contact the creditor directly. From the time you first hear back from the credit reporting agency when you report an error, you have 60 days to try to get the creditor to correct the information. During that period if you are not satisfied with the response of the creditor, you can then contact the credit reporting agency again and ask for an additional investigation.

4th: When It's Smart to Just Pay the Bill

If you've been battling it out with a creditor and don't want to pay the bill, you could end up severely damaging your credit score. While credit scoring companies must investigate any credit information you challenge, they tend to agree with the vendor in ongoing disputes and will only take the negative mark off your credit report temporarily while investigating a complaint.

If the amount in question is small enough that you can pay it off without financial distress, you may be better off paying the bill and taking the vendor to small claims court for a refund. Why hurt your credit score over a $30 or $50 dispute?

If the amount in question is much larger and you want to continue fighting, be sure you tell a potential creditor to expect the negative report and explain why you won't pay the bill. In some instances it may help, but don't be surprised if you can't get the best interest rates.

5th: Only Use Some of Your Available Credit

The ideal way to use credit is to use only 10% to 20% of your available credit and pay all your bills on time. That seems to get people the best credit scores. You may think you have to pay down all your credit cards to zero to get a good credit score. That's not true. To show you know how to use credit wisely, it doesn't hurt to occasionally pay a card over time. In fact, if you don't buy on credit and pay everything with cash, you'll likely have a lower credit score because you have no credit history for the credit scoring agencies to use.

Another mistake people make when they want to improve their credit score is to cancel credit cards. That can actually hurt your score since it reduces your available credit. Then your debt utilization ratio (the amount of debt you have as a percentage of your available credit) is higher -- which may lower your credit score.

6th: Pay Monthly Bills Ahead

There really aren't many ways to give your credit score a quick boost if you already have low debt and a stellar payment history. But I can suggest one technique you can try if you want to give your score a lift ahead of applying for a major loan, such as a mortgage.

If you pay your cards in full each month, those payments are made after the report has been sent to the credit reporting agency (right after the end of the billing cycle), so your outstanding debt looks higher than it is. If you're trying to improve your credit score, all you have to do pay your total bill at the end of the month -- before actually being billed. Check your balance due online or call your credit card company. If you do this for a few months, you should see a nice improvement in your credit score.

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