How to Improve Your Credit Score Pay bills on time: Paying your bills on time for just six months increases your score, even if you currently have a bad credit rating. Although a history of late payments negatively impacts your credit rating and will result in paying more to make purchases over time, late payments that occurred five years ago carry much less weight than missing a payment two months ago. Lenders start to forgive your past mistakes after you have demonstrated about a three year history of paying your bills on time. The sooner you start showing creditors that you are a good risk, the sooner you will establish an excellent credit rating and the higher will be your credit score. One of the biggest mistakes consumers make is not mailing their payments so that they arrive before the due date. A good rule of thumb is to send in monthly payments at least ten days before the due date so that they can be received and noted on your account. Adopting the attitude "they'll get their money when I'm good and ready to send it in" is only going to hurt you in the long run, particularly if you plan to apply for an auto or home loan. Those late payments will cost you thousands in extra finance charges when you buy a car or home because you will be charged a much higher interest rate. Don't have too many credit cards: Having too many credit cards (more than four for the typical American) negatively impacts your credit score. Order your credit reports from the three major credit reporting agencies and search for old credit card accounts that you no longer use and that are still reported as open. Write to the creditor and ask that these accounts be officially closed and that they report them as "closed by accountholder" to the credit reporting agencies. It is particularly important to do this well in advance of applying for a major loan, such as a mortgage, because lenders will look at your total available credit when deciding what loan rate you qualify for. Those old open accounts are going to cost you interest points (which means thousands more in finance charges) if they are still open and available for use. Don't overcharge on your credit cards: If your credit card balances total more than 80% of your available credit, your score suffers. Don't pay just the minimum monthly amount required; pay as much as you can every month. In fact, try to make a habit of using credit cards as only a convenience tool, meaning use them to make charges, but pay the balance in full each month. Paying down your credit card debt will raise your score. Don't apply for too many loans: Applying for too many credit cards and/or loans lowers your credit score. Every time you apply for credit, a notation is made on your credit file. Lenders, seeing too many credit inquiries, might be reluctant to extend you credit. Therefore, if you are denied credit by a lender, fix the problem (if you can) before reapplying with another lender. Try to keep the number of lenders to whom you apply at an absolute minimum. In addition, lenders are concerned about your particular portfolio (or mix) of financing. They don't want to see too much of one type of credit. A credit file full of credit card accounts but no installment loans scares them, and vice versa. They want to see a mix of various types of credit. (By the way, lenders take into account that your credit file will be pulled by many different lenders when you're shopping for a home loan. If this is done during a short period of time, about two weeks, it will not damage your credit rating.) Check your credit report every year: Get a copy of your credit report on file with Experian, Trans Union and Equifax every year and check it for inaccurate, false or outdated information, particularly if you are planning to apply for a major loan, such as a car or mortgage loan in the coming months. A recent survey by a consumer advocacy organization found that the vast majority of credit reports contain errors that result in the consumer being charged a higher interest rate. Even just a point increase in the interest rate results in thousands more paid on a home mortgage and hundreds more paid for a car loan. Don't be foolish and refuse to spend $10 to get a copy of your credit report. That $10 could save you more than $20,000 in finance charges on a mortgage. Open a checking and savings account: Opening checking and savings accounts won't improve your credit score per se, but it will help you get credit. On most applications for credit, you are asked if you have a checking and savings account, but rarely are you asked for the current balances of these accounts. People who don't have checking and savings accounts are discriminated against in the world of finance, so it is worth your while to open these accounts. Having both a checking and savings account will increase your odds of getting credit, but not significantly. Don't ignore your creditors. If something should happen that prevents you from paying your bills -- such as sudden unemployment or illness -- the worst thing you can do is try to avoid your creditors or allow your account to be turned over to a bill collector. If you can't make a monthly payment, call the creditor as soon as you realize this fact. Don't wait for your account to go delinquent and for them to start writing you nasty letters before you take action. Doing this will not prevent your credit rating from being damaged -- the creditor will place negative notations there anyway -- but it will give you some ammunition to later fight to get those negative notations removed. For example, if you know you aren't going to be able to pay next month's credit card payment because of illness, unemployment, etc., you could write a letter to the credit card issuer asking them for a reduced monthly payment to help you out. The creditor will agree to this unless he's an idiot, but will likely place a negative notation on your credit file indicating that your account is 30 (or more) days late or that you are a slow payer. What you want to do is get the creditor to send you something in writing telling you that he accepts your new payment plan and keep it for later use. If the creditor does indeed place a negative notation on your credit file, you can send a copy of the letter to the credit bureau as proof that the creditor accepted the arrangement, and thus, your payments were in fact, not late or slow, and request the credit bureau remove the negative remarks.
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