If your credit scores are not where they need to be, there are steps you can take that will raise them, and raise them substantially. There are companies advertising to do this job for you, but you don’t need to pay someone else to do this for you. No one knows your credit situation better than you do, and that makes you the best person to do it.
Follow the steps below to improve your credit and your credit scores. It’s important to do them well before you apply for credit; it can take anywhere from a few weeks to a few months to improve your credit, depending on how many issues there are.
1. Check for credit mistakes
Start by getting a fresh copy of your credit report. It will need to be a “triple-merged”; triple in that it will include information and credit scores from all three of the major credit repositories—Equifax, Experian and TransUnion.
Don’t skimp on this! If you get the cheaper single report from just one repositories it won’t reflect your complete credit history. Since not all creditors report to all repositories it will be possible that derogatory information will stil appear on a future credit report even though you’ve done a clean up on a single report.
Once you have your triple-merged report, review it closely, paying attention to all information reported on each entry of the report. If you see any late payments reported that you don’t agree with, you can dispute it with the creditor.
The report should provide contact information for each creditor who reports. You can contact the creditor and open a dispute, but be ready to document your position. For example, if you have copies of canceled checks that show you made a payment when the creditor reported a late, be ready to provide this information. If they show that an unpaid balance remains outstanding, be prepared to document that you made the payment.
If the dispute is settled in your favor, insist that the creditor report the change to all credit agencies. Get a letter from them confirming that this will be done, that way if it isn’t you’ll have written evidence. Once this happens, you’ll generally need to wait about 30 days for the revised information to reach all three credit repositories.
The removal of derogatory information can improve your credit scores considerably, especially if the alleged problems were within the past two years.
2. Clean up any lingering messes
You will probably find that some of the negative credit information is either correct, or that you don’t have documentation to prove your case. When it comes to late payments, you’ll have no choice but to relent and wait for good time to age the information out. As time passes, negative credit information becomes less relevant.
The story is different with unpaid balances. If you owe money and can’t document that you paid it, you’ll have to pay it off. If you have an outstanding collection for $50 or $100, the best course is to just pay it off. If it’s a larger balance or you don’t have the money to pay it in full, call the creditor and see if they’ll settle for less money.
If the balance is more than two or three years old this should be fairly easy. Offer them 25 cents on the dollar, and you may end up at about 50 cents. That’s still way better than paying the full amount. If they agree, follow the same procedure as you would with disputing late payments—get everything in writing and insist that the creditor report the updated information to all three credit repositories.
3. Take a credit time out
At least as important as taking care of previous credit issues is to clean up your act going forward. The best way to do this is to take a credit “time out”. That means that you don’t take any new loans, and that you don’t add any more credit card debt. You should do this for as long as it takes to substantially improve your credit profile.
The reason you want to do this is because new loans and increased credit card balances have a negative effect on your credit scores because the fresh debt isn’t “seasoned”.
4. Pay down some debts
This step can be more important than cleaning up past credit problems. A major factor in calculating credit scores is “credit utilization”. This is the percentage of outstanding debt to total credit available. As a rule, you want this number to be below 80% on as many credit lines as possible.
Here’s how credit utilization works: if you have a credit card with a $10,000 credit limit, and you owe $9,000, your credit utilization on the account is 90% ($9,000 divided by $10,000). You want to pay the balance down to below $8,000 so that the credit utilization rate is below 80%. This can have a huge impact on your credit scores.
5. Pay off small loans
Another factor that impacts your credit is the number of credit lines with outstanding balances. If you have ten credit cards and all of them have balances, this is considered a negative by lenders and in your credit score. To improve your profile, start paying off the smallest loans, that way you’ll eliminate a few active accounts.
6. Make all payments on time from now on
This step is obvious, but worth emphasizing. If you’ve had credit problems in the past, paying your obligations on time is a way to “stop the bleeding” going forward. The last thing you want to do is create new credit problems while you’re working to clean up the old one.
This should extend to rent, utility and insurance payments in addition to loans. This may not seem fair, but even though these vendors don’t report on your good payment history, many of them will quickly report non-payment to the credit repositories. Be aware and pay these on time too.
7. Be ready to play the waiting game to improve your credit
Like so much in life, time really does heal all when it comes to credit. Once you take care of old credit problems and begin reducing your outstanding debt and paying your obligations on time, your credit will slowly but relentlessly begin to improve.
8. Check your credit report at least annually
As a last and ongoing step, be sure to check your credit at least once each year. If there are any problems reported, you’ll be able to take care of them quickly. This is also important because the more recent a credit problem is, the more likely you’ll be to remember what the issue was and to have documentation to support your position.
Have you used any of these techniques to improve your credit profile?