There are lots of ways to boost your credit score. These three are the best at boosting your credit and can help you do it in six months!
The holidays often mean high interest credit cards and a wave of regret in January. I’m not advocating overspending and giving in to the holiday shopping bug. However if you are going to do it, there’s only one way to save money. You need to fix your credit and get a lower rate on your credit cards.
Credit card rates don’t come cheap with 10% generally considered a low rate and many borrowers with poor credit paying 24% and higher. Still, improving your credit to get that lower rate can save you a lot of money over the long-run. Charge just $1,000 on a card with a 24% rate and you’ll pay more than $239 in interest over two years. Charge the same amount on a card with a 10% rate and you’ll save more than $190 over the same period.
Increasing your credit score doesn’t happen over night. It typically takes about six months to start seeing real improvement. Check out the three steps below to get started now. You’ll be saving money before you know it!
Understand your Credit Score
Fixing your credit score starts with understanding what it is and how the three credit rating agencies calculate your score. The exact calculation is a secret but we know that there are five factors that affect your credit score:
Your history of payments is the biggest factor but something you really can’t change. If you’ve missed payments in the past, just resolve to do better in the future. This starts with making a budget you can keep and getting your debt to a manageable level.
The total amount owed on all debt; including home mortgages, car loans and credit cards is another big factor. This feeds into your debt-to-income ratio and the only way to fix it is to either make more money or pay off some of that debt.
Your length of credit history is another that is beyond your control. If you’ve got no credit history, open up a small credit account and use it for regular purchases like groceries. Most credit cards have a 28-day grace period on purchases so pay it off every month and you won’t have to pay interest.
Too many requests for new credit or too many new loans can affect your score so it helps to plan ahead. If you are going to be needing a big loan sometime in the foreseeable future, hold off on any new credit for at least six months so it doesn’t look like you’re taking on too much credit.
Types of credit is really where you can help improve your credit score. Non-revolving debt, loans with fixed-terms that get paid off, are considered better credit by the rating agencies. By comparison, having a lot of revolving-debt on credit cards will drive your score lower.
Fixing Credit Report Errors – A long process but big payoff
The first step to improving your credit score is to fix any errors on your credit report. It doesn’t happen often but the Federal Trade Commission estimates that at least 5% of credit reports contain errors. You are entitled to a free copy of your credit report each year from annualcreditreport.com, download a copy from each credit bureau and check for errors.
If there are any errors, you will need to contact the credit bureaus to have the item removed. Each reporting agency has a process for removing errors and it generally takes about two or three months. Make sure you have the error removed on each credit report separately and you could see your score increase by as much as 40 points.
Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 2000
Chester, PA 19022
Experian National Consumer Assistance Center
Address: 475 Anton Blvd.
Costa Mesa, CA 92626
Negotiate with Creditors to Remove Negative Comments
There’s also a way you can get negative comments removed from your credit reports as well. If you’ve got any payment that are behind or have been sent to a collection agency, contact the creditor and negotiate a settlement. They really don’t care about your credit score and just want to be paid off so agree to settle the loan, or a portion of it, if they agree to contact the credit reporting agency and have the negative comment removed. Be firm and make sure you get the deal in writing. Keep your end of the deal and check to make sure they keep their side of the deal about a month after the debt is paid.
Use Good Credit to Pay off Bad Credit
Remember that non-revolving debt does not ding your credit score as badly as revolving debt. If you’ve got high-interest credit card debt, pay it off by taking out a home loan or a peer-to-peer loan. Both of these types of loans are non-revolving and generally offer lower rates than credit cards. Only take out enough to pay off your credit card debt and don’t use it as an excuse to go shopping.
Beyond these three steps to fix your credit score, you really need to understand why you’ve got a lower score in the first place. There’s nothing wrong with having a low score because of a lack of credit history or other factors beyond your control. That’s something we all go through as we build our financial future.
If your credit score has dropped from negative marks on your credit report, things like failure to pay on time or at all, then trying to fix your score won’t do much good if you do not fix your spending habits (or start making more money). Learning how to make a budget you can keep doesn’t have to mean missing out on what makes you happy, it just means figuring out where you can save and where you can spend.
The best part about fixing your credit score is that it means more money in your pocket from lower interest rates. Prioritize the steps above for six months and you should see lower interest rates on any new loans. That saved money on lower rates can go a long way and can help put you on the path to financial freedom.
Joseph Hogue, CFA runs PeerFinance101, a blog where you share your stories of personal finance challenges and success. There’s no one-size-fits-all solution to meeting your financial goals but you’ll find a lot of similarities in others’ stories and a lot of ideas that will help you get through your own challenges.