Have you been turned down for a loan? Do you think you are being charged too much interest on a credit card?
These are common consequences of having a low credit score. For some, the consequences of a poor credit score are much direr. For example, for those working in high-security fields like government and government contracting, it can mean having a security clearance denied. For those submitting a rental application for a house or apartment, it can mean being turned down. For those in the military, it can mean a loss of promotion.
If you have a poor credit rating, this article will show you four easy tips to improve it.
Why Should I Care About My Credit Score?
Having a good credit rating allows you to borrow money more cheaply. Let’s say you want to buy a car and the purchase price is $50,000. You have a credit score of 670 so the salesman offers you a five-year loan at 4%. Someone else walks in with a credit score of 620. That person will be offered a loan too, but more likely at 9% or more.
Why? Because the second person is perceived as a higher risk of default on the loan due to poor credit management. That person can borrow money, but it will cost more to do so.
Lenders divide borrowers into three categories when considering what percentage rate to offer:
- Superprime: 781-850
- Prime: 661-780
- Nonprime: 601-660
The difference between the loan offered a Prime borrower and a Nonprime borrower can be 5% or more. If you are a Nonprime borrower, for a $50,000 car you will pay more than $7,000 more than a Prime borrower over the life of the loan. Does that seem fair, for a difference in the credit rating of only 50 points?
Four Tips to Raise Your Credit Score
It is not difficult to raise your credit score by 50 points or even 100 points. And if your score is lower than 601, know that any action you take today to improve your credit will reflect favorably upon you, in that anyone checking will see that your score is improving because of your recent responsible behavior.
Tip #1 – Check Your Credit Report for Errors
Common errors on credit reports include:
- Clerical errors
- Accounts reported more than once
- Closed accounts not properly recorded as “closed by grantor”
- Divorced spouse’s debts appear on your report
- Debts over seven years old remaining on your report
- Identity thieves opened and defaulted on credit accounts in your name
To dispute errors on your credit report, contact each of the three credit bureaus here:
Tip #2 – Pay Your Bills in Full and on Time
Paying even a few days late can trigger an alert on your credit report. Be sure to pay your monthly bills in full and on time. All of the accounts reported on your credit report should ideally read, “paying as agreed,” or be in the green.
If you have any accounts that are in the red, or in default, you should contact that lender and see what can be done to settle the account. You may be able to negotiate a settlement where you pay something less than what is owed. That is not as favorable as paying in full and on time but is better than the default.
Tip #3 – Use Credit Responsibly
It does not matter what your credit history is, today you can make a decision to use what credit you have responsibly, and start creating a positive credit history. Your credit report reflects your most recent behavior, so the more months you pay your monthly payments or minimums on time, the more default months will fall off your report. It will take time but will be worth it when you see your credit score improve as a result.
A large part of your credit score relies on your debt-to-income ratio. If you’ve overspent and have too much revolving debt relative to the amount of income you have, anyone checking your credit report will see this and perceive you are at high risk of default on any new credit line. Don’t stretch your credit to the limit.
If you have reached your limit or more, you might consider consulting with a debt settlement and bankruptcy attorney about your options.
Tip #4 – Keep Unused Credit Lines Open
If you have unused credit accounts, whether they are credit cards, a home equity line of credit or retail store credit, keep them open. It shows you have the restraint to refrain from using credit if you don’t have to, and keeps the ratio of borrowing power to debt within reason.
Don’t open several new credit accounts all at once – this will not improve your credit score. But someone paying on one or a few credit lines on time will have a higher credit score than someone who has no credit cards or credit history. You can become that person.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.