First, consider what goes into a credit score. Generally, your score is weighted by the following factors:
– Payment history (35%)
– Amounts owed (30%)
– Length of credit history (15%)
– Types of credit used (10%)
– New credit (10%)
Next, obtain copies of your reports from each of the credit reporting agencies (see link below). By law, you’re entitled to one from each every 12 months at no cost. You’re also entitled to one free if you’ve been denied credit, from the CRA that provided your score to the lender. Speaking of which, get your scores from each of the CRAs as well. They’re a few bucks each, but they serve as a snapshot of your overall credit health and are what lenders use in evaluating your creditworthiness. They’re also a way to monitor your progress.
Review each report carefully for inaccurate or outdated information. By law, CRAs can only report negative information for 7 years from the date it occurred (10 years for bankruptcies and judgments). Don’t bother trying to dispute accurate, but otherwise bad, information because it won’t work. Follow each CRA’s procedure for disputing information, and follow-up after 30 days if you haven’t received a response.
Pay down any accounts as much as possible. Remember – a big part of your credit score is based on the ratio of your balances to your credit limits. The lower your balances are, the more disciplined you appear. Plus, it shows that you have ample resources in the event of a financial emergency.
Don’t close accounts. Doing so will reduce your overall credit limits and could very well negatively affect the average age of your other accounts.
Don’t open new accounts. Although doing so will raise your total overall credit limit and lower the ratio of balances, this will definitely lower the average age of your other accounts. Even though many lenders offer rewards and other perks as an incentive to open a new account, the damage to your credit score outweighs the benefit of a new toaster or 10% discount off your next purchase.
If you plan to apply for a loan, do your shopping in a focused period of time as several inquiries in a relatively short period of time are counted as one, as opposed to a number of inquiries spread out in time.
If there is accurate negative information on in your reports, don’t despair. Although you can’t remove it, the significance of this information decreases as time goes on. Negative information that is less than two years old counts far more against you than information that is three years or older. Just make sure to pay your bills on time going forward, and let the old bad information gradually drop off your record over time.