Like many Americans
these days, New Ulm, Minnesota.-based small business owner and web developer
Robert Dempsey fell on hard times. The business he had launched in 2000
was decimated by the twin economic shocks of the tech bubble bust and 9/11.
As is the case for many entrepreneurs, Dempsey had financed his business
with personal credit cards, opening one after another and running them
up in an effort to stay afloat. He'd also signed what he says (in hindsight)
was a very one-sided contract with a company that supplies credit card
processing machines to small merchants.
Between all of that
credit card debt he couldn't pay off and the contract he couldn't afford
for the credit card machines, Dempsey's credit score took a substantial
hit. "My credit was very low in 2002," Dempsey says. During that period,
his credit score dropped into the low 500s, a number that all but freezes
you out of the conventional lending and banking market. But here's the
good news: Today, Dempsey's score is up to 780 - an almost perfect score.
And he did it all without having to declare bankruptcy, without any gimmicks
or any type of tricks. WalletPop found out which tactics worked for him
and then consulted some experts' for their recommendations on the best
way to increase that all-important credit score.
1. Know thy score.
Too
many Americans are uniformed about their credit score, says Barry Paperno,
consumer operations manager at MyFico.com. "The place to start for people
who want to raise their score is to know what's keeping their score from
being higher currently, which would mean getting your score," Paperno says.
Knowing your score tells you where you are now, and a copy of your credit
report will help shed light on what could be holding it down.
Dempsey went to the
credit bureaus to get his credit information so he could find out what
made him look like a high risk to lenders and how to fix it.
When you get your
credit report, review it for accuracy. Some people discover that their
score is dragged down due to incorrect information in one or more of the
three bureaus' reports. "Some [mistakes] are unbelievably costly," says
John Owens, senior vice president in retail payment solutions for U.S.
Bank. "If there's a charge-off that's inappropriately tied to your account,
get it out of there immediately because it will kill your score." For more
details about just how harmful such errors can be to your score and how
to correct them, check out this article.
If you're trying
to raise your credit, Owens says it's a good idea to keep regular tabs
on your score. "If you're actively trying to rebuild your credit, you should
probably check more often - a quarterly check is a good idea," he advises.
"There are services through the bureaus or lenders that will allow you
unlimited access to your reports."
2. Pay your bills
on time.
"The best thing you can do is pay your bills on time," says Gail Cunningham,
vice president of public relations for the National Foundation for Credit
Counseling. That's because a whopping 35% of your FICO score is determined
by whether or not you make payments on time.
That's a huge incentive
to pay on time yet many people still don't, says John Ulzheimer, president
of consumer education for Credit.com. "People think the due date is a suggestion,
not a hard and fast date," he says. "Take those due dates seriously."
If you miss one payment
but are otherwise an on-time customer, call your card issuer and ask if
they'll waive the black mark just this once. Even a single late or missed
payment can have a serious impact on your credit score, so it's worth the
phone call. Also, if you do miss a payment here or there, make it up as
soon as possible, says MyFICO's Paperno. The scoring system penalizes you
more the later your payment arrives.
If you think you're
going to have trouble meeting this requirement in the future, don't wait
to fall behind before you get help. Dempsey says when he realized he was
quickly sinking under the weight of his accumulated $20,000 in credit card
debt, he reached out.
"When I realized
all the credit cards were at their max and there was no way I was going
to pay them off, I started making calls," he says. Because Dempsey reached
out before the banks that held his accounts charged off his cards and sent
his debts to a third-party collection agency, he was able to work out a
solution directly with the lenders and kept detrimental charge-off notations
from appearing on his credit report.
3. Improve
your ratio. Unfortunately, just paying your bills on time isn't enough.
Credit.com's Ulzheimer says many people make only the minimum payments
on their maxed-out cards and assume that, just because they pay on time,
their score must be good. This isn't the case. Roughly one-third of your
credit score is derived from something called your utilization ratio, which
is how much of your credit you've spent versus how much you have available.
For instance, if you have two credit cards with limits of $5,000 and a
$1,000 balance on each, you're at a 20% utilization ratio.
That 20% is pretty
good but not great; think of it as a yellow light. Meanwhile, a 30% ratio
puts you in the red zone. It might not sound like much, but if you've used
up a little under one-third of your available credit, you may look like
a no-go to lenders. The scoring mechanism takes both individual cards and
a total number into account. So if you have a balance, it's better to have
it spread among a few cards rather than having one maxed out and the remainder
unused, says the NFCC's Cunningham.
In Dempsey's case,
he found that once he started paying down his balances without running
up additional charges, his score began to improve. "It was just the sheer
number of cards I had that was the problem," he says. His conventional
cards were close to maxed out, and his store credit cards all had relatively
low limits that didn't really help his utilization ratio.
One word of warning:
While trying to open a few new credit cards might seem like a quick fix
by boosting your "available" amount of credit, Megan Bridgett, training
manager at credit counseling organization GreenPath Debt Solutions advises
against it. Shopping too aggressively for credit is actually a red flag
that can have the opposite effect of dragging your credit score down. Having
more credit does look good on your report in the long run, but that's something
you should do when you're not in the final months of preparing to take
out a car loan, mortgage or other major debt.
4. Pay
early. If you use credit cards primarily for a month's worth of "free
money" and then pay them off, pay those bills early for a boost to your
score. Your credit score is a snapshot at that moment of your credit and
debts, so if you're going to a lender in the hopes of borrowing money,
zero balances will reflect better on you. The scoring formula has no way
of knowing that you pay your bill off in full every month; it's a smart
practice if you can afford it from a personal finance standpoint, but it
doesn't boost your score, per se. Where paying early helps you out is in
your credit utilization ratio, explains the NFCC's Cunningham. "If they
pull it while you've got a zero balance, that impacts your utilization
ratio," she says.
5. Correct
errors and out-of-date information. Dempsey had an account with a company
that processed credit cards for merchants that went into default. That
black mark stayed on his credit report for seven long years, dragging down
his score. But Dempsey was smart; he counted down the time until that seven
years was over, then immediately set about getting that harmful notation
removed from his report.
One word of advice:
If you're thinking about closing a credit card that you'd kept in good
standing, don't. It does your credit score more good to leave a record
of that account on your credit report, especially if it's a card you've
had for some time.
6. Lengthen your
credit history. This
tip and the one following it will be of primary use to young people trying
to build their credit history, as opposed to older people looking to rebuild
their score after a financial hardship. For many young people, the short
duration of their credit history works against them.
"The length of your
credit score is the third most important [factor]," says U.S. Bank's Owens.
As a result, if you're a young adult and you can get a parent or older
relative who has good credit to add you onto a credit card as an authorized
user, even if you never use that card, it can improve your score.
7. Diversify your
credit mix. "10%
of your credit score is based on the different kinds of credit you use,"
says GreenPath's Bridgett. For scoring purposes, there are two basic categories:
revolving credit, which is a credit card or a personal loan, and installment
credit, which includes obligations like a car payment or a mortgage (for
scoring purposes, the formula lumps student loans into this later category).
So if you graduate college with a student loan but no credit cards, look
into applying for a credit card, suggests MyFICO's Paperno. If you only
have credit cards, consider financing at least part of the purchase price
of your next vehicle if you don't have any student loans. Having both types
of debt could give your score a boost.
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