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How to Improve Credit Scores: Guide to Major Factors in a Credit Score

Guide to Improve Credit Scores tells you what major factors are keeping your scores low and what you can do to improve credit scores.

No matter where you’re starting, a FICO credit score of 599 or a credit score of 700, the following tips will help improve scores.

The better your credit score, the better your interest rates and loan terms. Good credit scores can bring a financial peace of mind and one less thing to worry about in a volatile economy.

A FICO score of 720 or above will pretty much qualify you for anything with good rates. Credit scores of 760 or above across all three credit-reporting agencies (Experian, TransUnion, and Equifax), are the best credit-score tier for all lending products and you will get the absolute best rates plus the lowest insurance rates. Good credit gives you access to:

  • The best credit cards – Good credit credit cards often offer 0% APR starting rates, no annual fees and top-notch perks and rewards.
  • Low interest rates – The higher your credit score, the lower your interest rates will end up being. High interest rates on 30-year mortgages end up costing you tens of thousands of dollars that could have been saved had your credit score been better.
  • Better car insurance deals – The majority of Americans will have their credit scores looked at when they apply for auto insurance coverage. People with low credit scores can expect to pay more (with the exception of California, Hawaii and Massachusetts because they don’t allow car insurance companies to use potential customers’ credit reports).
  • Cheaper cell phone plans – A low credit score can make finding an affordable cell phone plan almost impossible. You could be forced to sign up for a costly pay-as-you-go, no-contract plan or you may have to put down a security deposit.

Let’s concentrate on major factors negatively impacting your scores and a way to improve credit scores:

Major Factor No. 1 – Payment History

The most important thing you can do to rebuild your credit is to continue making on-time payments. NEVER pay late. Credit scores are calculated using 35% of your payment history. This has a huge effect on your credit score, positive or negative, depending on your payment habits. Missed payments along with late payments can kill a credit score.

If you have been late or missed a payment, do not continue that behavior. Bring any late payments current and stay current. You need to have good payment behavior to counter any past negative behavior.

Recent payment history has a much bigger impact on your credit score than older payment behavior. Older late or missed payments have less of a negative impact on your credit score but make sure you pay your bills on time going forward.

If you have a recent collection account, deal with it. If you pay the collection account request a full deletion of the collection account, as a paid collection account does nothing to improve your credit score. It is still a negative paid listing.

Another option would be dispute the collection account in order to try to get it removed from your credit report. An older collection account may not be impacting your credit score as much so it may be better to leave it alone.

Major Factor No. 2 – Amounts Owed

Credit scores are calculated using 30% of the amounts owed. This category may provide more flexibility in improving your credit than the “payment history” category. With a little practice and discipline, you can spend less and decrease the amounts you owe on credit accounts.

The most effective action you can take is to lower your balances on revolving debt such as credit cards. It will have in immediate impact and help you improve your credit scores. The amount owed on a credit card should be kept to 10% or less of your available credit limit.

Maxing out credit cards will lower your credit scores. There is no getting around this fact. Paying down your credit cards and other revolving debt reduces your credit utilization. The key here is to have the available credit but not utilize the available credit.

In reducing the amounts owed on credit cards, never close credit accounts, whether they are paid in full, older or just unused. Keep older accounts open even if you do not use them because it will add to your length of credit history which accounts for 15% of your credit score. Keeping old accounts will also give you more available, unused credit which helps your credit utilization ratio.

And remember, closing an account that you’ve had a negative payment history with will not make that negative history go away. Consumers sometimes mistakenly believe closing a problem account makes them go away, it does not. It is better to deal with negative accounts through the dispute process than to close the account. In fact, closing old credit accounts will likely lower your credit scores.

Major Factor No. 3 – Errors and Inaccurate Credit Items

Credit mistakes and errors come in the form of inaccurate information, errors in reporting payments late when no late payments were made, duplicate collection agencies reporting the same debt, incorrect dates and much more. Your score uses the information on your credit reports to calculate your FICO score, so inaccurate or incorrect information on your credit report can hurt your score.

The credit bureaus along with creditors who report to the credit bureaus are responsible for providing only accurate information. If your credit report contains errors, mistakes or inaccurate information you have the right to dispute that information either with the credit bureau and/or with the creditor.

Here is what you can do to dispute errors:

  • First, tell the credit bureau what information you believe is inaccurate.
  • State the facts and explain why you dispute the information.
  • Always request a deletion even though they are not required to delete, they may just correct the item.
  • The credit bureau must investigate the item within 30 days – unless they consider your dispute frivolous.
  • Include copies of any supporting documents or proof of the error.

Here is what you can do if the dispute is verified and remains on your credit report:

  • Dispute the item again. It will likely yield the same result unless you have new information or new supporting documentation to include in the dispute.
  • Request the Method of Verification (MOV). The MOV forces the credit bureaus to reveal how the dispute was verified.
  • Roll out your complaint. After you have tried the dispute process you are in the position to make a complaint with the Consumer Financial Protection Bureau (CFPB). It can be beneficial to get them involved because the credit bureaus will not ignore them and they respond quickly.

Major Factor No. 4 – Lack of positive information reporting

This may seem obvious to most consumers but you must have credit in order to improve your credit scores. It is not uncommon for consumers experiencing past credit problems to stay away from credit once those credit issues have been resolved. Some may never re-enter the credit arena. Your credit score will not improve if there is nothing in your files or you have limited credit information to calculate a credit score.

If you have experienced past credit issues but are now financially capable of managing credit, re-establish your credit history. Start by opening 2 or 3 credit accounts. Use the cards but do not charge over 10 percent of your available credit limit. That means if your credit limit is $500 NEVER charge over $50 unless you plan to pay the balance in full each month, before the due date. Establish this payment history for about 4 or 5 months. NEVER miss a payment, maintain low balances and watch your credit score rise.

Credit unions offer credit cards at great rates if your credit is good however, if your credit scores are lower, an alternative would be a credit card that extends credit to consumers with poor credit like the Indigo Mastercard®.

You can even use a debit card that reports to the credit bureaus to build credit.

Opening an installment loan such as a personal or auto loan will also help your credit score if managed correctly with timely payments. But be careful, an installment loan calls for a greater repayment commitment on your behalf. The greater commitment is what gives the greater reward with improving credit scores.

If you do not have the funds to repay an installment loan, do not open one. If your credit scores are decent check with your credit union, they often have great interest rates on loans. Lower credit scores may not get approved, in that case, check online sources for personal loans options (but make sure the interest rate is competitive).

Patience is key to improving credit scores. Once you begin working on improving your credit scores, it is important to monitor your credit scores on a regular basis to see how you are doing. It will help you stay on top of and take control of your credit.


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