Monitoring your credit score sounds about as attractive as writing a term paper.
But having a good credit history is critical to everything from getting a loan to getting an apartment. This means that if your credit score is low, you need to be proactive – not only by monitoring it, but by actively working to improve it.
Problem? There is a lot of conflicting information about what you should do to improve your credit score. Which tactic will actually make a difference, and which just seems to work?
Here’s what you really need to know about improving your FICO score, which is the key to so many financial dreams.
1. Focus on collection accounts first
“If you have unpaid bills in your credit history that are in the process of being collected, work on paying them off. [first] if possible,” says Kelly Long, member of the CPA FinLit National Commission at AICPA.
Letting an account get so late that it goes to a collection agency is never good for your credit, but the good news is that credit scoring algorithms will reward you for paying those bills in full.
When it comes to collection invoices, the key is to get everything in writing. Request a letter stating that they have received your payment in full and that they will update your credit report to show this.
In some cases, a collection agency may be willing to negotiate and pay off your debt for less than the full amount. Again, you’ll want to get something in writing to confirm that the debt has been paid off and the account closed. But be aware that such an arrangement may appear on your credit report as a settlement, which may be less positive than if you paid in full.
Read more: When an account ends up in collections and how to avoid it
2. Pay off debts close to your credit limit
Even if you pay your credit card bill on time, you should never keep your balance near the maximum limit. The magic ratio is 35%, says Kevin Gallegos, vice president of Phoenix Operations at Freedom Financial Network.
“If you have a credit card with a $10,000 limit and you owe $3,500 on it, that’s 35% usage,” he notes. “Anything over 35% is considered high and may [negatively] affect credit ratings. More than 50% will have a certain negative impact on the credit rating, and the maximum number of cards will have a very negative impact on the rating.”
Read more: What is your credit utilization ratio?
3. Get a higher credit limit (if you can)
Believe it or not requesting a higher line of credit with an existing account can actually improve your credit score, says Gail Cunningham, spokeswoman for the nonprofit National Foundation for Credit Counseling (NFCC).
“Or open a new line of credit. The idea is that you will owe the same amount of money but on a higher line of credit, so your credit-to-debt ratio will improve,” she explains.
“However, this option may not help you if you already have credit problems because it takes good credit to get more credit. However, if your credit score is in the 600 or 700 range and you want to improve it even more, you can find a credit card that offers a good chance of approval for your credit score range.”
She adds, “However, I would caution that this strategy only works for very disciplined people who know they won’t take on more simply because they have access to a higher line of credit.”
In other words, relax at the mall with an increased line of credit.
Read more: What credit score do you need to get approved for a credit card?
4. Look for non-credit accounts that will report payments to credit bureaus.
John Ganotis, founder of CreditCardInsider.com, makes a remarkable point: “Rebuilding your credit doesn’t always have to include a line of credit.”
One way is to register the utility service in your name.
“Call your providers to find out who reports to the credit bureaus.”
You don’t even have to go directly to providers if you don’t want to. Experian Boost is a free service that credits you with timely utility bills – mobile phone, internet, cable TV, heating, electricity, water, and more. You simply connect your bank account and Experian does the rest.
Another is to report your living expenses to the credit bureaus, including rent.
“Experian and TransUnion now include rental payments [in assessing FICO scores] when communicating through third-party online services.
Read more: Create credit by paying rent
5. Avoid commercial credit repair companies.
Some businesses charge a hefty amount to “repair” your credit, but they can actually do more harm than good, says Carl Robins, vice president and mortgage banker at PrivatePlus Mortgage in Atlanta.
“What they don’t tell the consumer is that they are signing up for a service to improve their scores, which lenders — and current underwriting rules for mortgage deals — won’t accept if there are still outstanding credit disputes on their credit report. ”
He adds: “They also don’t explain the cumbersome process of removing unresolved disputes from credit reports in order to qualify to buy a house or refinance their current mortgage.”
If you feel like you need help managing your credit, consider nonprofit counseling options such as NFCC.
How to get approved for a line of credit with a less than ideal credit score
If you follow the steps above and continue to pay all your bills on time, your credit score will improve.
However, unfortunately this takes time. It can take a couple of years to improve your credit score from below average (mid 600 or less) to good (720 or above). If you’re hoping to buy a house or take out another new loan in the meantime, this can be a problem.
Here are some things to keep in mind:
1. Don’t recklessly apply for a new loan
Credit bureaus take note every time you apply for a loan, and doing it too often will further hamper your efforts to improve your credit score.
Keep in mind that other factors, such as your income and credit utilization rate, are taken into account when applying for a credit card.
Try not to apply for a new loan unless you absolutely need it or if you’re not sure you’ll be approved.
Read more: Why you might be denied a credit card despite your excellent score
2. Work with a public bank or credit union.
If your credit score isn’t what it should be, a relationship with a local bank or credit union can really come in handy.
“A banker who knows you might be able to sort out bad credit,” says Charlie Crawford, president and CEO of Private Bank of Buckhead in Atlanta. “They will be looking at the big picture, not just the score or some other piece of information.”
Best of all, the local banker can be direct with you and let you know your chances of approval before you even apply. Waiting just a couple of months while you make some adjustments to your credit usage or budget can mean the difference between a mortgage being approved or denied, and a knowledgeable banker can tell you that.
Read more: Credit unions vs. banks: think locally, save money?
3. Consider a secured loan
“Giving a cash-backed loan is one way to demonstrate your ability to pay without putting a new bank loan at risk,” says Crawford.
If your credit score is below 600, you may consider getting a secured credit card to help you set up a new line of credit and notify the bureau of timely payments.
A secured credit card works just like a regular credit card, except that you first need to deposit money into a savings account to “secure” your line of credit. Most secured credit cards can be converted to traditional credit cards (and you’ll get your security deposit back) after a period of responsible use.
Read more: When to Consider a Secured Credit Card
bottom line
The path to improving your credit history is not always easy, but it is worth it. Consumers with good credit pay thousands less in interest over their lifetime and avoid the hassle of getting a job, an apartment and, of course, loans.
Featured image: Nataliealien/Shutterstock.com