So you’ve got a medium credit (630-680) – but you want to improve your credit score to get great credit (750+). Luckily, lot’s of people have been through a similar journey, and there’s some pretty simple methods to achieve your goals.
The guiding Principles
As a basic rule of thumb to improving credit – remember two guiding principles:
(1) Carry less debt
(2) Pay everything on time religiously.
Step 1: Signup for a Free Credit Monitoring Service.
To begin with, you’ll need to figure out where you stand and track it. You can get your free credit report here but you’ll want to keep track of your credit report throughout time. So you don’t keep having hard inquiries, you’ll likely want to look into the following tools to help you improve your credit score:
(1) Capital One Credit Wise
(2) Credit Karma’s Credit Monitoring
Both of these services offer online portals or monthly email summaries detailing – how your credit has changed, any major impacts, and give a general idea of trends. They use more modern VantageScores rather than true FICO’s to make these determinations, but the resulting trends should be similar. I personally use Capital One as they send me monthly digest emails (and nothing more), and should I choose to monitor the results online I can. Its not something requiring hourly checkups though, so I find the monthly summaries more than enough, and the results are easy to interpret.
Example Summary Report from Credit-Wise
Step 2: Setup a credit “cleanse” for your outstanding issues
The first thing you’ll want to note on your credit report is whether the information is accurate. Its best to go line-item by line-item through the report to figure out if each debt or inquiry is accurate. Considering almost 17.6 million american were victim’s of identify theft, many times these criminals will use your credit to apply for fake credit cards, loans, or driver’s licenses. Its best to be highly skeptical of any information on your credit report.
Strangely – often collections can happen un-knowingly as well and have a severe impact on your credit. As an example, when you sell a car privately if you do not release liability of the car properly (and the new owner refuses to register the car), then any driving infractions or parking penalties will be billed to you. Unpaid parking tickets, traffic citations, and other infractions can go on your credit report once they’re left unpaid.
Assuming you’ve found something wrong – you’re first recourse should be to contact the “billing location”. For parking tickets, you might contact the county and provide evidence that the vehicle was sold. In the case of suspected identity theft, its a good idea to both dispute the charges (yourself or using a credit corrections agency), as well as to freeze access to your credit report. You can freeze your reports, but bear in mind you may incur a small fee each time a lender wants to re-access your reports (you can read here for more details). As a last recourse, think of hiring a credit-corrections agency to fix erroneous information on your report.
Step 3: Sell, Refinance, Reduce and repeat as needed
To improve your credit score, often you’ll need to reduce your total outstanding debts. If you’re using over 30% of your available credit limits (especially on your credit-card balances) then its likely to impact your score. To reduce your useage (and debts) think about:
- Paying a higher percentage of bills using debit/check rather than credit-cards: If you’ve been using credit as a means to collect points and keep a high floating balance, you’re likely hurting your credit by doing so. Until you’ve got that higher approval, you should think of paying more via debit/check until your credit score shows commensurate improvement.
- Consolidating debts towards the lowest-interest sources: If you’ve been keeping a high balance because you can’t pay via debit/check now is a good time into re-pooling all your existing debts. Think of this as a one time activity – you cannot and should not drive the balance on your cards back up (this is a sign of outliving your means). In this exercise, consider refinancing your home or refinancing your car in order to secure cash to pay outstanding credit card debt. This only makes sense if the APR rates are lower for the car or home refinancing than from the credit-card balance (and it almost certainly will be).
- Selling debt-financed assets that you can’t comfortably afford: So you’ve done this first two steps and are back in debt. Perhaps its a sign that your consumption is exceeding your income. Its time to prune any asset that’s primarily debt financed. Got a new boat (get rid of it until its comfortable again). If you want to improve, it can take some hard steps!
Step 4: Calendar every payment and reschedule for the same date
Remember your second Golden Rule? To be religious about always making payments on time it helps to :
(1) Reschedule payments so they’re all at the same time (1st of last day of the month work best)
(2) Set calendar reminders for each and every payment date.
You want to minimize your chances of missing a payment from some minor brain lapse. To improve your credit score, it helps to be a zealot abut payment times.
Step 5: Stick to a 12-18 month budget and plan
Lastly – the toughest thing about improving your credit is how slowly the process will go. Much like weight loss, fitness, or other long term goals this won’t be an exercise in instant gratification. It takes a while to improve your score and you’ll need to stick to it. In many cases, that means spending less to payoff your existing debts. In order to do so, you’ll need to break some old, and bad spending habits and keep and monitor a tight budget.
The good news? After 12-18 months many of your expenses will go down. As a result of having a much improved credit score your car payments, mortgage payments, and credit-card payments will have lower interest rates and that means it will be easier to save money for that financial cushion you needed. Its a difficult road, but not one that’s impossible!