Improving Credit Score

Over time a borrower can improve the information in his or her credit report by paying credit obligations on time and using credit wisely. As derogatory data in the credit report gets older, it has less influence on the score. A missed payment from four years ago will not count as much as a missed payment that is six months old. A credit score, like a credit report can be thought of as a snapshot of an individual's changing credit record. Scores from different credit bureaus will be different because of the different data available in the consumers file at each repository. If a request is made to obtain another report in order to get an updated score, then the score is likely to change for many reasons; however, it is not possible to limit how that score will change. The credit items on the report are updated often, so new items are likely to have been added since the previous report was generated. In addition, existing items will have aged. Repeatedly requesting a borrower's credit report may substantially increase the number of inquiries on the repository report, which may affect the score adversely.

Important factors in FICO credit score

• Payment History (35% of score).
• Amounts Owed (30% of score).
• Length of Credit History (15% of score).
• New Credit (10% of score).
• Types of Credit in Use (10% of score).

Check your reason codes

There are some specific ways to improve your credit score. To understand why your credit score is not high enough, look at the score reason codes given with each score analysis report.

"Score reason codes" explain the top reasons your score was not higher. These codes can give you an idea of how you should start improving your score, such as closing unused credit accounts or being more diligent about making payments on time.

Steps to Improving Your Credit Score

1. Pay your bills on time.

Payment history is the single most important factor in determining your credit score, making up 35% of the total. Late payments, especially mortgage or rent payments, make a big impact on your credit history. A recent late payment has more negative weight than one that was made several years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.

2. Check your credit report and remove any errors.

Your credit score is only as good as what shows up in your credit report. By making sure that only your accurate credit history appears on your report, you ensure that the credit score it generates isn't lowered by inaccurate information. Review your credit reports from all three credit bureaus regularly as well as several months before applying for a loan.

3. Pay down your debts

Keep balances low on credit cards and other "revolving credit." Maxing out credit limits results in a major point deduction. Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. For a good credit score, your account balances should be below 50% of your available credit .

4. Pay off debt rather than moving it around.

Moving your debts around or constantly transferring balances over multiple cards will not improve your score. The most effective way to improve your score is by simply paying down the amount you owe.

If paying off debt has become a serious issue, meet with a credit counselor. Do your research and make sure you're seeing a legitimate, reputable counselor.

5. Avoid too many inquiries.

Don't apply for too much credit in a short amount of time. Inquiries are interpreted as a sign that you have been actively seeking credit, and may be in financial difficulties or in the process of overextending yourself. Multiple requests for your credit history (not including requests by you to check your file) will reduce your score.

A good rule of thumb to keep in mind when you're hunting around for good loan rates, is to shop around within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, based in part on the length of time over which recent requests for credit occur.

6. Have credit cards - but manage them responsibly.

In general, having credit cards and installment loans which you pay on time will raise your score. Someone who has no credit cards tends to have a lower score than someone who has managed credit cards responsibly.

7. Establish credit early.

In general, a longer credit history will increase your score. Approximately 15% of your total score will depend on your credit history. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Consider setting up automatic monthly payments for items like phone bills and utilities on a credit card and locking the card away where it's not a temptation.

Keep in mind that raising your score is just like shedding those extra pounds: It requires time and patience. The best approach to improving your credit is to manage it responsibly over time.