How to Improve Your Credit Score in 2013
- Wednesday, March 06, 2013
These days, a good credit score well over 700 pays in dollars and cents. It open doors to money-saving opportunities from low-interest mortgages and loans to lower APR credit cards, better insurance rates and even jobs.
Building a good credit score is a lot like getting into good physical shape. It’s a slow process that takes years of work and consistency. And if you stumble back into your old sedentary lifestyle, you can lose a lot of progress in a big hurry.
That’s disheartening news if you have a bad credit score—but that doesn’t mean you’re out of options. While it’s true that the best way to ratchet up your credit score is to pay off your bills and loans on time each month for years, there are a number of things you can do starting today that will give your score a nudge in the right direction.
Piggyback. If a family member with a high score is willing to add you as an authorized user to one of their credit cards, you’ll start reaping the benefits of their strong history. This is perfectly legal and legitimate, and it produces quick results.
Let’s say Susan is heading off to college and has a sketchy credit history resulting in a pathetic score of 615. Her dad calls his credit card company and requests to have Susan added as an authorized user. Each month as the account is reported to the credit bureaus, the activity will go into both Susan’s and Dad’s credit file. Susan’s credit score will see a decided improvement in a fairly short period of time. However, as an authorized user, Susan is not liable for payment of the account. Even if Dad should default, they cannot come back on Susan for payment.
There is a downside for the authorized user that you need to understand: If the owner of the credit card account (Dad in this scenario) gets into hot water and starts missing payments, pays late or defaults on the account, this tactic could backfire.
It’s all reported to the authorized users’ account.
Report errors. We know from reputable surveys that about 79 percent of credit reports contain at least one error, 25 percent of which are errors that could lead to the denial of credit. Once a year go to AnnualCreditReport.com to check your report(s) for free. If you find errors—and send a letter to bureaus to clear up mistakes—you could add a significant number of points to your score.
Rapid rescoring. If you’re applying for a mortgage this year, you need to know about rapid rescoring. It can help clean up errors fast. If there’s a known error on one of the borrower’s credit reports, and you can provide legitimate documentation showing it’s an error, you can get a quick recalculation of your score to help with a lending decision. Judgments are made within 72 hours. Because it is quite expensive—generally more than $100 for each disputed line on the report—it’s usually valuable only to those who are looking at a substantial mortgage. Rescoring is not an option available directly to consumers, but a loan broker can arrange for this service.
Automate. Late payments decimate a credit score in no time flat. If absentmindedness accounts for many of your late payments, it may be worth signing up for auto bill pay. It’s a great way to make sure you don’t accidentally miss a payment because it got lost in the mail, or it fell behind the desk, or it got ignored when you were on vacation.
Explain yourself. If there are extenuating circumstances that could help a person looking at your information come to a better conclusion, you can attach a letter of up to 100 words that explains the situation. Instead of creditors looking at the information and wondering what happened, they will see more clearly how you got sidelined, then how you turned things around. That can be very good for you.
Pay twice a month. If you’re someone who charges close to your credit limit each month—even if you pay it off in full—it could damage your score. Your credit score is very sensitive to how much you’re charging compared to what your credit limits are. The solution is to pay off the bill in installments—once before the closing date and once after. This simple tactic can counteract some of the damage that results from being close to your limit.
Pay down the card that’s closest to its limit first. Your credit score is affected not only by your total debt-to-credit available ratio, but by that ratio for each individual card. If you have cards that are close to maxed out, pay off those first. If you have cards with balances that are way up there, it’s keeping your score low. Widening the gap between what you owe and your remaining credit limit will pay off by increasing your score.
This article appeared originally in the Debt-Proof Living Newsletter in January 2013.
"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.
Publication date: March 6, 2013
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