A new year brings resolutions, even to those who are typically non-resolute. For anyone that has a financial-based resolution, chances are you can help yourself along by tidying up your FICO credit score, that all-important number that will largely determine what you can buy and how much you have to pay to get it. From cars to homes to department store credit cards and all that lies between, your credit score is the only metric that really matters. (Follow the tips in 5 Keys To Unlocking A Better Credit Score to rebuild a ruined credit rating.)
Here are seven tips for tidying up that all-important three digit number.
- Get Your Credit Report!
This one is both simple and obvious. No successful journey starts without a map, and your credit reports are the road maps you need. TV and internet ads are littered with offers of free credit reports, but be careful as many come with hidden sales pitches for expensive ancillary products like "credit protection services" and "credit monitoring services." Some are just outright scams.
The Fair Credit Reporting Act (FCRA) stipulates that we are all able to get one free credit report per year from the three major agencies. The FCRA also allows you to obtain a free report within 60 days of being denied credit, if you are unemployed and seeking a job in the next two months, or if you have been a victim of identity theft.
- Dispute and Correct any Errors
Legitimate bad notches on your report can only be fixed with time and effort, but information that is just plain wrong should be corrected swiftly and diligently. This typically involved two steps, especially if you are looking to improve your score quickly. You'll need to contact the creditor and the credit reporting agency to make sure both parties are in agreement on the error.
An official dispute should be done in writing to both parties. If you have any corroborating information, such as canceled checks or statements, include copies of these in your dispute letter to both the reporting agency and the creditor. The credit bureau will then have 30 days to respond to your letter, and they should do so in writing, along with an updated credit report if your disputes have been verified and fixed.
Also, if you have an error on one bureau's report, chances are that the other two are showing it as well. As logistically difficult as this is, you'll want to repeat the above process for all three credit bureaus – you never know which report a particular creditor might use in determining your status for a new loan or credit card.
- A Little Boost Could Mean a Lot
Most big lenders have breakpoints for when a better deal or lower rate come into play. If a mortgage lender needs to see 710 for the best rate, and you've got 705, those 5 measly points could mean thousands of dollars in higher interest. So aiming small may be just enough to get you to the next round number.
While you may not be able to know in advance what number gets you what benefit, if you are a few points below the next round number, work hard on the little things, such as evening out your outstanding balances. It looks better to the credit bureaus to see three accounts at 30% capacity rather than two accounts at 10% and one at 90%.
- Get a Score-Building Card
Consider getting a credit card with a low limit that you use to make purchases that you would normally pay for with cash or a debit card. The most important thing is to pay off the entire balance each month, which should be easy as you were going to use cash in the first place. By having one perfect card, you can build a few valuable points to your credit score. Even a pre-paid credit card can help you here – there are dozens of "credit building" pre-paid cards to choose from.
- Canceling Unused Cards is Not a Fix
It seems logical that fewer means better when it comes to lines of credit. But most reputable sources say that canceling an unused card can actually hurt your score rather than improve it. The reason is because in the eyes of the reporting agencies, you'll have a higher utilization ratio, or higher total outstanding credit versus what you have available to you. You'll essentially have the same outstanding balance as you did the day before (assuming you haven't paid anything down), but you'll have less credit available to you.
If you to plan on cutting up one or more cards, however, make sure you keep your oldest cards open. Length of time carries some weight in the score-factoring process, so if you must reach for the scissors, go for your newest cards first!
- If Considering a Major Purchase, Seek a Rapid Rescorer
If you're lining up to a major buy like a new home, you'll want any credit-building work you do to be reflected as quickly as possible. Some lenders use what are known as rapid rescoring services, where information can be updated in as little as 72 hours, versus the 30-day standard.
If you have errors on your report, or can pay off some of your balances prior to shopping for a mortgage, you'll want to find a lender that uses a rapid rescoring service. This may cost you up to a few hundred dollars extra, but it could also save you thousands in extra interest payments over the life of a mortgage. Talk to your lenders, but be aware that only legitimate errors or the paying down of balances are likely to notch up your score in the short term.
- Get Current, Stay Current
At the end of the day, your payment history is the biggest driver of your credit score. This matters more than the size of the balances themselves. If you're behind on any credit lines, do all you can to get current.
In this economy, creditors may be more likely than ever to work with you, so make some calls and suck up your pride if you need to. Work with a credit counseling service if you need to. But get current on your accounts, and work within your existing credit lines rather than filling out new applications. Whether you get that new card or not, excessive application filing can hurt your score, as it gives the impression of desperation.
Credit Scores can't get perfect in a day, any more than they can get trashed in a day. Setting up prudent payment habits and staying within your means are the only surefire ways to maintain a credit score that gives you the flexibility to get favorable credit when you really need it.
Understand that now more than ever, both businesses and consumers are struggling to find some balance. It serves all our best interests to hunker down, work with each other, and do all we can to satisfy the needs of both ourselves and our creditors.