Credit score too low? Here are steps to boost it
Get smart about the scoring system
More and more Americans are checking their credit and understand how the scoring system works.
Fifty-seven percent of consumers have obtained at least one credit score over the past four years, up from 49 percent four years ago, according to a new survey by the Consumer Federation of America and Vantage Score Solutions.
The survey also shows that people who get their score know much more about how the system works than those who do not. For instance, large majorities of people correctly identify three key factors used to calculate credit scores – missed payments (86 percent), high credit-card balances (81 percent) and personal bankruptcy (79 percent).
Even so, there are gaps in knowledge. Significant minorities incorrectly think that age (41 percent) and marital status
(38 percent) are used in the calculation. And majorities wrongly believe that tax liens (64 percent), medical collection accounts less than six months old (62 percent) and civil judgments (63 percent) are used to compute scores.
So, should you fall into that knowledge-gap camp, here’s what you need to know about how credit is scored and how to raise that score.
❚ Get a copy of your credit reports: Go to www.annualcreditreport.com and download a free copy from each of the three main credit bureaus.
“Credit scores are an important piece of a person’s financial puzzle, and people should make every effort to improve it to get the best rates,” says April LewisParks, director of education and corporate communications for Consolidated Credit. Next, review your reports and identify mistakes and/or information you feel is incorrect.
“If you believe something is inaccurate, by law you are allowed to dispute the item(s) with the credit bureaus to attempt to have it removed,” she says.
Do that by submitting a dispute letter, along with any documentation or proof that the information is inaccurate. The bureau then asks your creditor or lender to verify the information provided, Lewis-Parks says.
“If it can’t be verified, then the item must be removed from your report,” she says. “Also, if an item appears on the credit reports from all three bureaus, you will have to make your dispute to each bureau separately,” she says. “The bureaus do not communicate and share information with each other.”
Note that your credit score is calculated from your credit report.
❚ Take this quiz: To improve your credit knowledge, take the online credit score quiz at www.CreditScoreQuiz.org.
Learn the factors
Many factors affect your credit, and each represents a different percent of your score:
❚ Payment history counts for 35 percent of FICO, a widely used score: To lenders, your history of payments indicates whether you’ll make payments on time in the future. A FICO score is a three-digit number calculated from the credit information on your credit report at a consumer reporting agency at a particular point in time. It summarizes information in your credit report into a single number that lenders can use to assess your credit risk quickly, consistently, objectively and fairly.
❚ Amounts owed count for 30 percent of your FICO score. Plenty of available credit relative to the amount owed indicates to lenders that you manage credit responsibly.
❚ Length of credit history counts for
15 percent of your score. The age of your oldest account tells lenders how much experience you have handling credit.
❚ Credit mix in use counts for 10 percent. Lenders will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
❚ New credit counts for 10 percent of your FICO score. To lenders, opening too many new accounts in a short window of time could point to problems.
Your credit score can vary from provider to provider. Here are the credit score ranges used by major credit scoring models, according to credit.com: FICO score range: 300-850.
❚ VantageScore 3.0 range: 300–850.
❚ VantageScore scale (versions 1.0 and 2.0): 501–990.
❚ Experian PLUS score: 330-830.
❚ TransUnion new account score 2.0:
300-850.
❚ Equifax credit score: 280–850.
Develop a game plan
“Building – or rebuilding – credit scores can be done, but it does take some time,” says Kristen Holt, president and CEO of GreenPath Financial Wellness. “It’s best to have a plan ... and stick to the plan.”
What steps your plan should include:
❚ Pay bills on time: “If you fall past due, pay the bill as soon as you can,” Holt says. “Look into automatic payment options so you won’t miss a payment.”
❚ Keep card balances well below the limit: Holt suggests trying to use no more than 40 percent of your available credit lines. And, if you want to pay down or pay off multiple credit cards, Holt suggests paying off the one that has the smallest balance first, then pay the accounts down or off one at a time.
Linda Jacob, a financial counselor with Consumer Credit of Des Moines, Iowa, and author of “No More Paycheck to Paycheck,” advises against using more than one-third of your available credit on each card or line of credit.
“As soon as you go over the one-third, it is affecting your credit in a negative way,” Jacob says.
❚ Pay off negative/collection balance on report: According to Holt, paying off old debt, such as credit cards, collection bills and medical balances, helps you avoid any further collection or legal action that could become more damaging to your credit.
“Negative marks on your credit can remain on your reports for up to seven years or sometimes more, so the sooner they’re resolved, the better,” she says.
Be patient. “It may take some time to see improvement, but in as little as six months you can see positive results,” Lewis-Parks says.
❚ Keep inquiries to a minimum: “Opening and closing credit cards can also impact your score,” Lewis-Parks says. “When you apply for new credit, the lender makes a hard inquiry on your credit report, which might shave a few points off your score.”
❚ Have a nice credit mix: If you only have a car loan, apply for a credit card as well. You want to have a variety of credit, Jacob says.
Robert Powell is the editor of The Street’s Retirement Daily and contributes regularly to USA TODAY. Email Bob at rpowell@allthingsretirement.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.