Updated: May 15, 2020
Your credit report is one of the most important tools you have in the financial world. It defines who you are to lenders of all types. Removing errors from your credit report, or "cleaning it up" is only one part of the process. You need to ensure that you are doing everything possible to keep your credit report in stellar shape so that you also look great in the eyes of a credit card company or home mortgage lender.
Part of this process is to tackle the errors on your credit report. That is the right place to start since this information is hurting you for no real reason. As you wait to find out if the errors will be removed by the credit reporting agency, take some time to work through the following steps. These ten methods to improving your credit score are simple and straightforward, but they also provide you with the resources you need. They may not be easy to do and most of them require time. Nevertheless, making key decisions right now will help you to get back on track and have a high-ranking credit score.
Keep in mind the importance of a quality credit score. With many banks and lenders tightening their lending practices, they simply are not giving out the types of loans you may be used to getting with an average or lower credit score. In fact, if your score is not in the upper 700's, you may be unable to get a home loan without a significant amount down. The days of having a 400 credit score and getting a great line of credit may not be back anytime soon. Therefore, take steps right now to improve your credit score so you do not have to hope that you can get that home of your dreams.
#1: Monitor Your credit Report
As we have talked about, knowing what is on your credit report is the key to being successful at managing it. But, just pulling your credit report one time is simply not going to cut it. You need to know what is happening on your credit report regularly.
It is an option to get a copy of your credit report for free only one time per year from each of the three credit bureaus. This means that you can get a copy of your report every four months for free. Most of the time, the information included on one will be the same as all three reports. Nevertheless, there can be differences, which is where you need to be cautious.
If you have found very few mistakes on your credit report up to this point, do not worry about doing anything more than what you are already doing. As long as you are monitoring the report every four months, you should be all right and you should catch errors often enough.
On the other hand, if you have a credit report that has been full of errors, especially those concerning identity theft or larger scale problems with address mistakes and problems with particular creditors, it is best to look for a service to help monitor your credit. These services are available through each of the credit reporting agencies, TransUnion, Equifax and Experian.
There are a variety of types of service and reporting options to consider here. For example, you may choose to have just a copy of your credit report sent to you each month. You may want to watch your credit more closely and want to have a new report more often, such as every few weeks. You may want to know your credit score, too. The more often you need to know your credit report information, the more costly the reporting costs will be. The credit score is usually an additional cost to the credit report.
Reporting services like these can range in cost from $10 a month up to $30 or $40, depending on the type of service you select. Choose what works best for your individual needs. It may not be necessary to have a product that provides you with a large amount of information or frequent reporting, unless you have been having significant problems.
#2: Use Credit Wisely
Credit is like a gift. You get it, but only for as long as you take care of it. Stop taking care of the gift, and it will fall to pieces. It is much more difficult to pick up those pieces and tries to put the puzzle back together than just to maintain the gift in the first place.
Take credit seriously and only use it when you need to use it. For example, it is important to realize that credit that is used during the month should be paid off within the month. That way you do not pay any financing charges and your balance remains low.
It may be important to know what the credit reporting agencies think is important when it comes to credit reports:
Low balances compared to the amount of available credit
Payments are made on time
You do not have too many credit cards
The amount of total debt you have is not too high, or higher than what is considered appropriate for your income level. This is a debt to income ratio.
It is best to keep the credit you have low in use. Make your payments on time and be sure that you are monitoring your credit limits as often as possible. Paying off the balance on your credit cards on time is quite helpful to maintain a low balance and saving yourself a good deal of money in the process.
Credit is a necessary for purchasing a home and buying a car, most of the time. You will need it throughout your life, which is why you will need to keep your long-term financial goals in mind when using credit for any reason.
#3: Pay Your Debt Down
If you are like most Americans, you have a sizable amount of debt already. How in the world will you be able to get your credit score up if you are struggling with a large pile of debt? The tips provided here should be a great place to start. The key is to work towards your debt step by step until you can pay it down totally. In other words, if you have a lot of debt, just start working towards paying it down now.
There are two main objectives to consider when paying down debt. Choose the method that works best for you.
Pay down your debt pay making the minimum payments on all of your accounts except for the one with the lowest amount owed. Pay this one with as much as you can until it is paid off. Then, take all the extra you have (including the minimum payment from the first paid off account) and apply it towards the next lowest debt you have. Keep going one by one. The benefit here is that you are paying down your debt quickly: you will see results more often at first, which is great motivation to keep going.
Apply the same practice as in the last method, but this time, arrange your debts by the amount of interest that is charged on them, with the highest debt being paid off first. This way, you are able to pay down the type of debt that is costing you the most. Technically, you will pay less on the debt this way, too.
In either of these options, stop using your credit cards regularly. Put them away. Save them for a rainy day. Put away $1000 into a savings account for emergency needs. Use it just for emergencies. This keeps you from applying too much debt to your credit cards. Eventually, you cut your debts considerably.
#4: Monitor and Limit Inquiries
As mentioned earlier, inquiries on your credit report will detract from it. It is inevitable to have some, especially if you are looking for new lines of credit. The key is to keep them as low as possible. On your credit report, there is a separation between the two types of inquiries, those that affect your credit score and those that do not. The goal is to monitor both, though. If you are prone to accepting credit cards if offers are sent to you, sign up for a do not mail registry. You can opt out of future credit card offers by visiting the website of the Consumer Credit Reporting Industry at OptOutPrescreen.com. You can also locate the Federal Trade Commission for your state and request that these offers stop that way, too.
While you are watching your credit report, keep an eye on the credit inquiries, too. You definitely have to ensure that those that count against you are monitored. Report anything that should not be there. In addition, if they do not come off your report within two years, these too should come to the credit reporting industry.
What about the way that you use those credit inquiries? The best way to keep them off your credit report is to ensure that you are not over applying for lines of credit. Here are some tips:
Choose one or two cards to apply for at any time. Limit the number of applications you file within 3 to 6 month periods.
When you are shopping for the best insurance or credit card, ask for quotes from the service providers without allowing them to pull a credit report. Let them know the approximate credit score you have. This will allow you to compare several lines of credit or insurance companies without having to subject your credit report to too many inquiries.
For larger loans, such as a home mortgage loan or car loan, again obtain quotes for loans based on your approximate credit score. This also protects your credit. Many lenders allow you to do this right online. If they do not, look elsewhere for the loan you need.
#5: Don't Over Obtain
Many times, it can seem like lenders are willing to give you an unlimited amount of credit. Beware of this. Lenders may see your credit report and believe you are a good risk. They may not realize that three, four or more credit lenders have also noticed this and also have offered you lines of credit. It is easy to get too much credit.
You may be thinking, "is there such a thing as too much credit?" The answer to this is yes! If you have too much credit, lenders will begin to freeze up on you. The problem is the credit to income ratio, or the amount of money you bring in with the amount of potential credit you have available to you. If you have too much credit, the lender may determine that you are too risky to lend more money to, even if you have a lot of open, available credit.
In this situation, you may not have a problem unless you are hoping to get a large loan such as a home loan or a home equity line of credit. In these situations, you may be limited. Obtain only the amount of credit that you need to have. Even if you do get offers from a variety of other lenders over the course of time, you do not have to get them all!
In situations where you receive an offer for a lower interest rate than the rate you are already paying, consider closing the original line of credit prior to accepting the new line of credit. If the account will close after you pay it off completely and it is not one of your oldest credit cards, you may find closing it to be an easy decision.
#6: Do Use Credit
You are likely confused. Didn't we just say not to use credit but to pay down your debt? This is true and should be something that you spend a good deal of time doing. If you are carrying debt month to month, it is likely costing you great deal of money. Paying down your debt as much as possible is a must to get your credit score up. The problem you may encounter, though, is that once you have paid off that credit, you have no real credit history for the current period.
So, what do you need to do? Work to pay down your credit. If you are carrying debt month to month, pay it off as quickly as possible. You will definitely want to maintain only lower balances whenever it is possible to do so.
Once you have it paid down to a level you feel comfortable about paying off within a month's time, use your credit again. However, there are some very strict guidelines to remember here:
Only make purchases you can pay off within the month. You want to get the bill and pay off the entire balance.
Know your grace period, or the amount of time you can borrow money without accruing any finance charges. Most lenders have a 25-day period between months that allows you to use the credit line and pay it off without incurring any finance costs.
Use credit only when you need to. Instead of making large purchases using credit, use it for those costs that you are confident you can repay each month. For example, you may want to use a credit card for your gas purchases throughout the money, knowing you will have the funds to repay the debt. This allows you to accumulate no debt month to month.
Credit card debt is not a good thing. Still, in order to have a good credit history, you will need to use credit from time to time. Show that you are a good credit risk by making payments on time each month to pay off the total amount of money you borrowed throughout the month.
#7: Pay More Than Minimum Payments
One of the mistakes many people make is to make payments on their accounts but only to make minimum payments. The minimum payment on your account is perhaps the worst payment to make besides no payment at all. Even paying a few extra dollars is better. Here is why.
If you pay just the minimum payment on a loan, any loan, it is likely you will pay that debt for years longer than you need to. On a credit card, borrowing just a few thousand dollars may mean only paying $50 a month to repay this debt. But that minimum payment is only a fraction larger than the finance charges for each month. You will remain in the loan ten, twenty or even thirty years depending on the amount of debt it is. For this reason, it is exceptionally important for individuals who are carrying debt month to month to pay off that debt as quickly as possible by paying more than the minimum payment.
Look at it another way. You may not have thought about paying extra per month on your mortgage payment but this too can help you. For example, if you pay a few hundred dollars extra each month on your loan, or you may payments every other week rather than once a month, you could cut five to ten years off the loan's length. This also means a savings of hundreds of thousands of dollars in interest charges. Use a credit card calculator or mortgage calculator to figure out what you are really paying to borrow those funds and to pay it back so slowly!
#8: Build Credit With Secured Credit Cards
Perhaps you already have bad credit. Cleaning up your credit card and removing any of the old, outdated information there should help. You may also see an improvement in your credit score if some of the creditors are unable to prove your obligation to pay the loan. Yet, even when you do clean up your credit report, the damage to it over this period of time can be harsh to your credit score. One way to boost it is to obtain new credit and work towards showing that you are a good risk by making payments on time and keeping your balance low.
Like all good catch 22's, though, to build credit means that you would have to have access to it. The good news is that there are options available for doing just that. These are called secured credit cards. Your goal is to find a credit card that's secured that also reports to credit agencies. Many now do this since it is far more attractive to the borrowing when it does.
A secured credit line is quite different from a standard line of credit. Here, the credit line you are given is based on the amount of cash you have paid towards the card in the form of a deposit. For example, you pay $1000 of a deposit and therefore have a $1000 credit line of credit to use. You'll use it and make payments on it as you do with a standard line of credit. The difference here is that your balance is there for "just in case" situations where you may default on the loan. The lender has protection from this.
At the same time, your good credit habits are also helping you to get a better credit score since the card is reporting each month to the credit agencies.
#9: Know When You Need Help
There will be times when you just cannot get out of debt on your own. You may find yourself struggling to make enough money to meet just the minimum payments not to mention paying more than you owe. If you are struggling with your debt load, seek help. There are a variety of for profit and not for profit options available to help you to get out of debt.
In order for your credit to improve, you need to get out of debt first. If you cannot do this on your own, the next best option is to secure the help of a professional who can work with you and your lenders to get the debt paid.
One option to consider is debt counseling. These professionals work with your lenders to get a lower monthly payment, to reduce the amount of interest charged to you and sometimes to lower the amount you owe. You'll be on a monthly payment plan requiring you to make a set amount payment each month. That single payment is divided by the counselor and paid to each of your lenders every month. Debt counseling can initially hurt your credit score, but over time, you will be paying down your debt and therefore find your way out of the debt hole. You may see your credit score increase because you are paying off the debt.
Bankruptcy is another option for some, when all hope is lost in making monthly payments. Take it easy, though. Bankruptcy will put a black mark on your credit report for the next ten years! That is a long time to have a hurt credit score with no way to clean it off your report.
#10: Live the Lifestyle You Can Afford
Perhaps the most important bit of help available to you is this simple sentence. You need to live the type of lifestyle that you can actually afford, not one that is reliant on credit cards. The sad fact is that if you take away all of the debt you had, you probably would have much more money per month to buy what you want and to live the way you want to. The key is not to have to pay the finance charges that often hurt the average consumer.
Determine what your lifestyle is by using a cash only system for at least one month. For that entire month, do not make any type of charge to your credit cards. You will need to still pay them on time, including your mortgage loans. Instead of charging dining out or purchases to a credit card, only use cash. At first, you may find this very limiting, but imagine if you actually had all the money available to you that you are currently paying towards your debt each month. What you may find is that it is not only affordable to live on cash only but it may be a better lifestyle with less stress.
Making good decisions about credit is difficult to do, for anyone. Yet, you can easily accomplish this by spending your time making good financial decisions overall. The process will allow you to walk away finding yourself in a financially sound situation rather than a financially poor situation.
Use these ten tips to help you through the process of cleaning up your credit debt, not just today but going into the future, too.