There are few systems in our lives which are so important and yet at the same time so opaque as credit.
By Matt Shealy
Although credit reporting companies provide a service to lenders which has a massive impact on your business funding chances, their exact formulas for calculating your scores are not public knowledge.
The good news is that while we do not know the exact fine details of how each agency creates their scores, enough is known now for us to understand what the most important factors on a report are and how to change the way your report looks in order to get your score headed in the right direction.
Whether your credit score is below average and in desperate need of recovery or you simply want to make your good score great to get better rates in the future, here are the best ways to improve your credit score.
Make Your Monthly Payments
The biggest red flag your credit report can have is a history of repeatedly missing payments or defaulting on your loans entirely. Missed payments can remain on your report for up to seven years, so while you cannot immediately remove recent mistakes from your report, you can start the clock on progressing to a clean record by always making your payments on time to all lenders. Even if it is just paying the minimum in months when money is tight, that still is enough to create a proven record of timely payment.
Don’t Close Paid Off Accounts
One of the biggest mistakes people make with their credit is to get so relieved at paying off a troublesome card that they close the account. While it may seem like a good idea, in actuality it hurts you in two ways. First, if the card being closed is your oldest card it will lower the length of credit history you have. In addition, credit utilization, or the percentage of available credit you have used, plays a big part in determining your score. By simply keeping your account open with nothing on it you raise your total available credit without raising your credit used, thus lowering your utilization.
Ask About Limit Increases
Another easy way to get your credit utilization number down is to increase your existing credit lines. If you are using $1,000 of a total set of credit accounts equaling $3,000, for example, but are able to get one of your credit lines increased by $1,000 then your utilization would drop from 33-percent to 25-percent. As long as you don’t behave as if you can now spend the extra money on offer the limit increase means an easy improvement to your utilization.
Focus on Lowering Debt
The hardest way to improve your utilization is also the most effective as it means getting closer to being debt free. While minimum payments will keep your history free of demerits, it often does little to lower your overall debt due to interest. If possible, always seek to pay extra to begin lowering your debts. Not only will you lower your utilization but you’ll also save big in the long term due to saved interest.
Pay Off High-Interest Rates First
If you’ve got a choice between paying down one account or the other, it’s usually the best option to pay off your higher interest rate accounts first. Your dollar goes further when it is used to pay off a higher rate, and that helps to keep your overall debt levels lower.
Pace Your Applications
The biggest Catch-22 is that it is possible to get hit negatively for not having enough accounts open, then get hit negatively for too many hard inquiries if you try to open too many new accounts. You should space out your new credit applications if possible. If you are nearing a big purchase like a home avoid opening unnecessary new accounts in the months leading up to your mortgage application.
Get Your Report
The most important part of a credit repair campaign is staying on top of your credit score. Not only is everyone owed a free annual credit report, but you can also use free credit score tracking programs to get real-time updates of your credit throughout the year. This helps you to identify problems and start working on solutions.
Dispute Inaccurate Marks
Sometimes your credit report can feature red flags that aren’t even yours. This can be the result of outright fraud or even honest identification errors with the actions of someone who shares your name inaccurately applied to your account. Whatever the cause you should dispute the mistakes immediately with both the credit reporting agency and the company submitting the error. The sooner the mistake is off your report the better.
Handling your credit doesn’t have to be scary. While you likely can’t create a massive jump overnight, by following safe borrowing habits you can start yourself on the path to stronger credit and all the benefits which come with it.
Matt Shealy is the President of ChamberofCommerce.com. Chamber specializes in helping small businesses grow their business on the web while facilitating the connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide.