How to Improve a Low Credit Score

You already know that your credit score is used by lenders to determine the kind of loan and interest rates you can get. What you may not know is that your credit score is also used by other companies, like insurance carriers, cell phone companies, apartment complexes and utility providers, to determine how much you pay. If your credit score is too low, you may even be denied service completely. Some companies even check your credit score before deciding to give you a job or promotion. Bad credit can have so many negative effects on your life that it makes sense to take steps to improve a low credit score.

The Fair Credit Reporting Act passed in 2003, gives each person the right to get a copy of their credit report from each of the three credit reporting bureaus once a year. Depending on the state in which you live, you may even be entitled to two credit reports each year. The easiest way to order your free credit reports is to go to www.annualcreditreport.com. You can order your credit score as well, but there will be a charge for that.

Look over your credit reports and check for errors. Some things to look for are accounts that aren’t yours, missed or late payments that aren’t accurate, too high or too low credit limits and negative information, with the exception of bankruptcy, that is older than seven years. If you see any errors, contact the credit bureau to find out how to dispute the information. You will need to contact each bureau independently because they do not share information.

Late payments have a huge impact on your credit score. Begin paying off any overdue balances and make all of your payments on time in the future. Recent payment history affects your credit score more than older payment history, so your credit score will improve over time as those late payments fall further into the past. Also, even if you have a lower credit score, you may be able to get a break if you can show that you have made all of your recent payments on time.

Once you are paying all of your current bills on time, begin paying down your debt. Ideally, you want your debt to be less than 20% to 50% of your available credit. Instead of paying a little a bit toward each of your creditors, choose one debt to pay off completely and pay the minimum amount on the others. Once you have one debt paid off, request that the creditor mark your account as paid in full on the credit report. You can then focus on another debt to pay off. In general, it is better to pay off newer debt rather than old debt, especially if the debt is near or past the statue of limitations for debt collections in your state. By making a payment on an old debt, you are making the account active again and resetting the clock for the statue of limitations. Also, most negative information only remains on your credit report for seven years, while paid, closed accounts remain for 10 years or longer. If you have a delinquent debt that is close to seven years old, your best bet may be to leave it unpaid and let it fall off your report.

Every time someone checks your credit report, it is recorded as an inquiry. Having too many recent inquiries on your credit report is a sign that you are actively applying for more credit and are a higher risk. Inquiries that were not initiated by you don’t have any impact on your score, but inquiries that resulted from you applying for a credit card or loan do have an effect. Try to avoid these activities if you want to raise your credit score.

It may seem counterintuitive, but closing your old, unused credit cards can actually lower your credit score. The reason is that you are reducing your available credit compared to your debt. Leave your old accounts open for now and only begin closing them once you have paid down your debt. Also, you should never close your oldest credit card, even if you never use it, because this establishes the start date of your credit history. Having a longer credit history has a positive affect on your credit score.

While there are a few things you can do to improve your credit score quickly, most significant changes will take time. Be wary of companies offering quick credit report fixes because there is very little they can do that you can’t do yourself for much less. Some credit repair companies are no more than scams designed to take your money and leave you with nothing to show for it. Don’t be afraid to seek credit counseling if you need it, but be sure the company you are working with is legit.