In his book Dirty Little Secrets, bestselling author and personal finance expert Jason R. Rich reveals the secrets of credit reports and ratings and explains what you can do to improve both. In this edited excerpt, the author outlines nine steps you can take to improve your credit and increase your credit scores.
Some of these strategies may seem like common sense; however, they represent solutions to the most common reasons why the typical person develops a less than perfect credit rating.
1. Pay your bills on time, every time. This strategy may seem extremely obvious. However, late payments are the most common piece of negative information that appears on people's credit reports and is often responsible for significant drops in their credit scores. When it comes to loans and credit cards, it's vital that you always make at least the minimum payments in a timely manner, each and every month, with no exceptions.
2. Keep your credit card balances low. One factor that's considered in the calculation of your credit scores is your credit card balances. Having a balance that represents 35 percent or more of your overall available credit limit on each card will actually hurt you, even if you make all of your payments on time and consistently pay more than the minimum due. Make timely monthly payments on the balance that are above the required monthly minimums.
If you have an average or better credit rating, consider asking your credit card issuers to increase your credit limits. However, do not utilize this extra credit by making more purchases. By increasing the amount of credit that's available on your credit cards while working to reduce your debt, you will improve your credit utilization and help to increase your credit scores.
3. Don't close unused accounts. One of the factors considered when calculating your credit scores is the length of time you've had credit established with each creditor. You're rewarded for having a positive, long-term history with each creditor, even if the account is inactive or not used. So avoid closing older and unused accounts. Instead, simply put those credit cards in a safe place and forget about them. Although you don't want to have too many open accounts, having five or six credit card accounts open, even though you only actually use two or three cards, can be beneficial.
4. Only apply for credit when needed, then shop for the best rates. Applying for a retail store card you're going to use once or twice, when you could just as easily use an existing credit card, might not be the best idea. Over the long term, if you maintain a balance on a store credit card, for example, the fees and interest charges are often much higher than a major credit card.
5. Correct inaccuracies on your credit reports, and make sure old information is removed. One of the fastest and easiest ways to quickly give your credit scores a boost is to carefully review all three of your credit reports and correct any erroneous or outdated information that's listed. If you spot incorrect information, you can initiate a dispute and potentially have it corrected or removed within 30 days.
6. Avoid too many hard inquiries. Every time you apply for a credit card or loan, a potential creditor/lender will make an inquiry with one or more of the credit reporting agencies (Experian, Equifax, or TransUnion). This inquiry information gets added to your credit report(s) and will typically remain listed for two years. If you have multiple inquiries in a short period of time, whether or not you get approved for the loan or credit you apply for, this can dramatically reduce your credit scores.
7. Avoid bankruptcy, if possible. In terms of your credit reports, credit rating, and credit scores, filing for bankruptcy is one of the absolute worst things you can do. If your credit scores haven't already plummeted as a result of late payments, missed payments, charge-offs, and defaults, when the bankruptcy is listed on your credit reports, you'll notice a large and immediate drop in your credit scores. Furthermore, that bankruptcy will continue to plague your credit reports for up to ten years and could keep you from getting approved for any type of loan or credit during that period.
8. Avoid consolidating balances onto one credit card. Unless you can save a fortune in interest charges and fees by consolidating balances onto one credit card, this strategy should be avoided. One reason is that maxing out any of your credit cards will detract from your credit scores, even if you make on-time payments. Assuming the interest rate calculations make sense, you're better off distributing your debt over several low-interest credit cards. An alternative is to pay off high-interest credit card balances using another type of debt consolidation loan or by refinancing your mortgage with a cash-out option.
9. Negotiate with your creditors or collection agencies. Contrary to popular belief, your creditors and lenders aren't your enemies. Your creditors are in business, and the nature of business dictates that they strive to earn a profit. When you don't pay your bills, this impacts a creditor's ability to do business and impacts its bottom line. Many creditors are willing to be understanding of difficult financial situations, especially if you openly communicate with them in a timely manner.
In other words, instead of skipping a handful of payments or defaulting on a loan, contact your creditors and lenders as soon as a problem arises and negotiate some form of resolution that's within your financial means. Depending on the level of your financial difficulties, your creditors may be willing to assist you.