How to Fix and Improve My Credit

By Nina Makofsky

  • Overview

    Fixing and improving credit depends on seeing your credit report and understanding how credit scores are determined. Improving credit is key for many reasons beyond being accepted or declined for a credit card. If you ever apply for a mortgage or attempt to finance a car, the lender will check your credit score and give you a rate dependent upon your credit score. The higher the credit score, the better risk you are considered in the eyes of the creditor. Aim for the average American's score of 725 and you will have a good credit score. At 770 and above, you qualify for the best loans and terms.
    • Step 1

      Procure a copy of your credit report. An amendment to the Fair Credit Reporting Act makes it your right to see your credit report, for free, on an annual basis, from all three consumer reporting institutions. You can order these free reports from the Federal Trade Commission (see Resources below). Once you review your reports from Experian, Equifax and TransUnion, you will have a firmer idea of how you appear as a credit risk to potential lenders. Note that credit reports are different from credit scores, which require a payment to receive.
    • Step 2

      Review every detail on the credit reports. Begin with checking the spelling of your name and your social security number to make sure your information is not being confused with someone else's information. Check the accuracy of addresses, as well as the number of applications for credit. Review the balances on loans and any instances of denied applications for lines of credit. Check everything against your financial records.

    • Step 3

      Report errors or inconsistencies (such as duplicate information) to the consumer reporting institution as well as to the creditor who made the erroneous report. Lodge all complaints in writing, provide account numbers and date the correspondence. Save copies of everything you send. In ideal circumstances, mistakes are cleared within a month. The fact is, some mistakes remain on credit reports for 3 months and may require following up to rectify.
    • Step 4

      Attack your debts. Do not consolidate debt or max out one credit card to keep other lines open. Low balances held on several cards looks better than a full balance on one card. Cut your costs and stop shopping so that you can live beneath your means and have enough leftover to pay debts. Pay all bills on time. Do not close accounts or open new accounts, because these acts can lower a credit score, at least temporarily.
    • Step 5

      Play the game of ratios. Once you understand the criteria that affects your credit score, you can strategize to fix your credit. About one-seventh of your score is derived from the length of credit history, while a much bigger chunk--one third--is determined by payment history. Never pay bills late or let debts go into collection. It's much better to call creditors and negotiate new terms. Another third of your score is arrived at by utilization, which is the amount of debt you hold relative to the amount of credit you have. Only 10 percent of the score is driven by your combination of revolving and installment credit, and another 10 percent by "hard pull" credit inquiries.
    • Skill: Moderate
    • Tip: In fixing your credit, time is on your side. Recent activity carries more weight than activity prior to the past 2 years.
    • Warning:
    • Avoid scam agencies trying to sell the credit reports to which you are already entitled.

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