If you are able to raise your credit score by 200 points, you’ll save money every time you borrow. A 140 point increase in your credit score could save you enough on a mortgage to buy a car in five years. According to MyFICO.com, borrowers with a 760 credit score pay an APR of 2.62%, while those with a 620 FICO pay 4.6%. The borrower with good credit and a $400,000 mortgage would pay $31,249 less than the borrower with fair credit over five years.
If you have a credit score in the 500s or lower, raising your credit score by up to 200 points but how can you raise your credit score by hundreds of points? It depends on the cause of your low credit score.
First, request a copy of your credit reports from www.annualcreditreport.com and pay the nominal fees for your scores from Experian, Equifax, and TransUnion. Check the reason codes, which indicate why your score is lower than you want.
Common Causes of Low Credit Scores
There are four common causes of low credit scores:
- Inaccurate information on your credit report
- Bad credit history
- Excessive credit use
- Too little credit history
Once you know why your score is low, you can attack the problem.
How to Dispute Inaccurate Credit Information
Common errors on credit reports that lower scores include:
- Reported account balances are higher than actual balances.
- Accounts discharged in bankruptcy are still showing as outstanding.
- Creditor reported on-time payment as late.
- Creditor sent account to collection in error.
- An account shown as delinquent is current.
- A reported derogatory item belongs to someone else.
- Identity theft is the cause of derogatory history.
Contact any creditors that reported your account inaccurately. If it’s a collection account, reach out to the collection agency and the original creditor. Hopefully, they resolve the error, report correctly to the credit bureaus, and your score increases in the next few days or weeks.
The other option is disputing incorrect entries in writing with the credit bureau(s). Report the error online to TransUnion, Experian, or Equifax. Include supporting documents like screenshots of your bank statement. Keep notes of calls and copies of any correspondence with the creditor.
The credit bureau has 30 days after receiving your dispute to investigate and verify information with the creditor. It must report the results back to you within five days of completing its investigation.
How to Repair Bad Credit History
Can you fix past credit mistakes? Sometimes, you can. If your account is current and you have a good repayment history with a creditor, try writing a “goodwill letter.”Explain why you paid late that one time. Apologize profusely and ask to have the late payment removed from your credit report.
Sometimes, there is no cure for bad repayment history but time. However, it might not take as long as you think — while some advisors scare you by saying credit history stays on your report for years and years, they don’t mention that recent good credit counts a lot more than old, bad history. Keep making your payments on time for six to 12 months, and you’ll see a big difference. Don’t increase your debt; just pay your accounts on time and watch your score rise.
Collection Accounts
Does paying off a collection account increase your credit score? Not necessarily. In fact, doing it the wrong way can hurt your FICO score. Here’s how to effectively deal with collections:
- Verify the collection: you might not actually owe the money.
- Check the age of the collection before contacting anyone — if it’s uncollectible (check your state’s statute of limitation), you might want to let it fade away.
- Send the collection agency a pay for delete letter.
- Pay the collection if you choose to.
- Contact credit bureaus to delete old or inaccurate collections.
- Check your credit report to make sure the entry has been deleted.
Why does the age of the collection matter? Because old collections don’t impact your credit score much, and they might even be uncollectible. But once you contact the collection agency, you restart the clock on the debt, make it new again, and that damages your score.
Reduce Credit Utilization
Increasing credit card balances means that you’re spending more than you earn — a major cause of bankruptcy. That’s why credit scoring models give so much importance to the amount of available credit you’re using. The amount of revolving credit you use divided by the amout you have is your credit utilization ratio.
If you have $10,000 in available credit and use $4,000, that’s a 40% credit utilization ratio. Most consumers with good credit scores have utilization of 30% or less. You can decrease utilization by:
- Paying down your balances
- Increasing credit limits (apply for more cards or request higher limits)
- Consolidating credit cards with a personal loan (paying off your credit cards with an installment loan drops your utilization ratio to zero, even though you still owe the same amount).
Make sure that if you consolidate your revolving debt with a personal loan you don’t run your credit card balances back up.
Build (or Rebuild) a Credit History
You can’t have a high credit score if you don’t use credit. Open a few accounts and charge small amounts. Pay off the balances every month and watch your credit scores climb. But how do you get credit if you don’t have a credit score?
- Ask a friend or relative to co-sign for you.
- Have friends or family with good credit add you as an authorized user to their accounts.
- Apply for a secured credit card with a company that reports to credit bureaus.
Borrowing with a co-signer may allow you to get a better interest rate. It’s important to remember that late payments on your part can harm yours and your co-signer’s credit report.
Authorized user accounts are safer. By making you an authorized user on one or more credit cards, your buddies can share their good repayment history with you. You don’t use the card, but when your friend pays the monthly bill, the payment appears on your credit report and helps improve your score.
Secured credit cards are not technically credit. That’s because you deposit money with the card issuer, so no one is advancing you money. But you do get a card, and your credit limit may increase over time. If you manage the account responsibly, you may eventually get your deposit back, and get to use real credit. Choose a card with low fees, and ensure that the issuer reports to all three major credit bureaus.
Once you fix your most serious credit problems, keep making your payments on time and reducing your balances. As long as you use credit conservatively and pay on time, your credit scores will continue to improve, and you’ll get better and better credit offers.
