Credit scores are computer-generated numbers that determine your creditworthiness. And if applying for a credit card or other financing, you can expect your creditor or lender to check your credit score. A high score says a lot about your payment habits and indicates that you’re likely to repay your financial obligations, whereas a low score closes the door on several financing opportunities. However, bad credit isn’t permanent, and as bad as your situation may appear, you can take steps to improve your credit score.
Get a copy of your credit report and fix errors.
Inaccurate information on your credit reports, such as unpaid accounts, high balances, judgments and liens, can lower your credit score and prevent a loan approval. Request a free copy of your three credit reports from Annual Credit Report. Carefully read each page of the reports to ensure that all information is correct. Don’t ignore errors. Submit a dispute request online or send a written dispute to each credit reporting bureau – Experian, TransUnion and Equifax. The sooner you get mistakes off your report, the sooner you can raise your credit score.
Pay your bills on time.
It’s never too late to start improving your payment habits. Your payment history makes up 35% of your credit score; and the more late payments on your record, the lower your score. Never send a payment past the due date. If you can’t send a payment, notify your creditor or lender immediately to set up an alternate payment plan. Your creditor or lender may allow a partial payment, extend your due date or allow you to skip a payment.
Knock down your balances.
Like your payment history, the amount you owe makes up a big portion of your credit score – approximately 30% of your score. With this said, the more you owe creditors, the lower your credit score. Give your score a fast boost by eliminating your outstanding balances. As a general rule, you want to keep credit card balances below 30% of your credit limit. If you have a $5,000 credit limit, the balance on this credit card should never exceed $1,500. Always pay more than the minimum each month, charge only what you can afford to pay off each month and limit credit card use to emergencies.
Never close a credit card account.
Closing or canceling unused credit accounts is one way to simplify finances and control debt. But if you cancel an older credit card account, you can harm your credit score. The length of your credit history plays a significant role in your credit score. For example, someone with 10 years of positive credit history is likely to have a higher score than someone with only three years of positive credit history. Canceling an older account decreases the length of your credit history and triggers a drop in your credit score. Keep these accounts open and periodically use your credit cards to keep the accounts active. Your credit score will improve as your creditor regularly reports positive information to the bureaus.
Stop applying for new credit.
Applying for new credit isn’t a harmless action. Each application that you submit for a loan or credit card triggers a credit report inquiry, which is when a bank or lender reviews your credit file. This seemingly harmless act can actually reduce your credit score by as much as 10 to 20 points – per inquiry.