So you’ve had a few problems getting the bills paid lately, and you’re wondering what you can do to repair the damage to your credit. You’ve got plenty of company. Tens of millions of people in the United States have credit blemishes severe enough (and FICO credit scores under 620) to make obtaining loans and credit cards with reasonable terms difficult. Or maybe your credit is OK, but you’d like to make it better. After all, the better your credit, the less you pay in interest and, typically, for insurance.
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To improve your credit scores, it’s important to know where you stand now. You can get free credit reports once a year, but you typically have to pay to see your FICO scores. (You can get other credit scores for free at sites like Credit Karma, but these aren’t typically the scores lenders use.)
You can buy two of your three FICO scores for $19.95 each at myFICO. (One of the three credit bureaus, Experian, no longer sells FICO scores to consumers, although it still sells them to lenders.)
If your scores are above 760, you’re probably already getting the best rates. If they’re anywhere below that mark, though, they could stand some improvement.
So here are the nine steps you can take to speedy credit repair:
1. Get a credit card if you don’t have one
Don’t fall for the myth that you have to carry a balance to have good scores. You don’t, and you shouldn’t. But having and using a credit card or two can really build your scores.
If you can’t qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card that reports to all three credit bureaus.
2. Add an installment loan to the mix
You’ll get the fastest improvement in your scores if you show you’re responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).
If you don’t already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you’ll want the loan to be reported to all three bureaus, and you’ll probably get the best deal from a community bank or credit union.
3. Pay down your credit cards
Paying off your installment loans (mortgage, auto, student, etc.) can help your scores but typically not as dramatically as paying down — or paying off — revolving accounts such as credit cards.
Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help; getting balances below 10% is even better.
Though most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
4. Use your cards lightly
Racking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What’s typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
You often can increase your scores by limiting your charges to 30% or less of a card’s limit; 10% is even better. If you’re having trouble keeping track, you can set up email or text alerts with your credit card companies to let you know when you’re approaching a limit you’ve set. If you regularly use more than half your limit on a card, consider using other cards to ease the load or try making a payment before the statement closing date to reduce the balance that’s reported to the bureaus. Just be sure to make a second payment between the closing date and the due date, so you don’t get reported as late.
5. Check your limits
Your scores might be artificially depressed if your lender is showing a lower limit than you actually have. Most credit card issuers will quickly update this information if you ask.
If your issuer makes it a policy not to report consumers’ limits, however — as is sometimes the case with “no preset spending limit” cards — the bureaus may use your highest balance as a proxy for your credit limit.
You may see the problem here: If you consistently charge the same amount each month — say, $2,000 to $2,500 — it may look to the credit-scoring formula like you’re regularly maxing out that card.
If you have an American Express charge card — the kind that must be paid in full every month, rather than the kind on which you carry a balance — you probably don’t have to worry, because charge cards typically aren’t included in the credit utilization portion of the FICO formula.
If, however, the card is categorized on your credit reports not as a charge card but as a revolving credit card, and either a credit limit or high balance is reported to the bureaus, your balances on the card could be a problem.
You could go on a wild spending spree to raise the high balance reported to the credit bureaus, but a more sober solution would simply be to pay your balance down or off before your statement period closes.
6. Dust off an old card
The older your credit history, the better. But if you stop using your oldest cards, the issuers may decide to close the accounts or stop updating them to the credit bureaus. The accounts may still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts, said Craig Watts, an executive at Fair Isaac, the company that created the FICO score.
So you might want to charge a recurring bill to one of those little-used accounts or take them out for dinner and a movie occasionally — always, of course, paying off the balance in full.
7. Get some goodwill
If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company (and the better your credit in general). But it can’t hurt to ask.
A longer-term solution for more-troubled accounts is to ask that they be “re-aged.” If the account is still open, the lender might erase previous delinquencies if you make a series of 12 or so on-time payments.
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8. Dispute old negatives
Say that fight with your phone company over an unfair bill a few years ago resulted in a collections account. You can continue protesting that the charge was unjust, or you can try disputing the account with the credit bureaus as “not mine.” The older and smaller a collection account, the more likely the collection agency won’t bother to verify it when the credit bureau investigates your dispute.
Some consumers also have had luck disputing old items with a lender that has merged with another company, which can leave lender records a real mess.
9. Blitz significant errors
Your credit scores are calculated based on the information in your credit reports, so certain errors there can really cost you. But not everything that’s reported in your files matters to your scores.
Here’s the stuff that’s usually worth the effort of correcting with the bureaus:
- Late payments, charge-offs, collections or other negative items that aren’t yours.
- Credit limits reported as lower than they actually are.
- Accounts listed as “settled,” “paid derogatory,” “paid charge-off” or anything other than “current” or “paid as agreed” if you paid on time and in full.
- Accounts that are still listed as unpaid that were included in a bankruptcy.
- Negative items older than seven years (10 in the case of bankruptcy) that should have automatically fallen off your reports.
You actually have to be a bit careful with this last one, because sometimes scores actually go down when bad items fall off your reports. It’s a quirk in the FICO credit-scoring software, and the potential effect of eliminating old negative items is difficult to predict.
Some of the stuff that you typically shouldn’t worry about includes:
- Various misspellings of your name
- Outdated or incorrect address information.
- An old employer listed as current.
- Most inquiries.
If the misspelled name or incorrect address is because of identity theft or because your file has been mixed up with someone else’s, that should be obvious when you look at your accounts. You’ll see delinquencies or accounts that aren’t yours and should report that immediately. However, if it’s just a goof by the credit bureau or one of the companies reporting to it, it’s usually not worth sweating.
Two more items you don’t need to correct:
- Accounts you closed listed as being open.
- Accounts you closed that don’t say “closed by consumer.”
Closing an account can’t help your scores and may hurt them. If your goal is boosting your scores, leave these alone. Once an account has been closed, though, it doesn’t matter to the scoring formulas who did it — you or the lender. If you messed up the account, it will be obvious from the late payments and other derogatory information included in the file.
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Other actions to beware when you’re trying to improve your scores:
- Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your scores. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it — but don’t do so without being asked.
- Making a late payment. The irony here is that a late or missed payment will hurt good scores more than bad ones, dropping 700-plus scores by 100 points or more. If you’ve already got a string of negative items on your credit reports, one more won’t have a big impact, but it’s still something you want to avoid if you’re trying to improve your scores.
- Consolidating your accounts. Applying for a new account can ding your scores. So, too, can transferring balances from a high-limit card to a lower-limit one or concentrating all or most of your credit-card balances onto a single card. In general, it’s better to have smaller balances on a few cards than a big balance on one.
- Applying for new credit if you already have plenty. On the other hand, applying for and getting an installment loan can help your scores if you don’t have any installment accounts or you’re trying to recover from a credit disaster such as bankruptcy.
By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you’ve hit the 700 mark, any tweaking you do will tend to have less of a positive impact.
And if your scores are in the “excellent” category, 760 or above, you’ll probably be able to eke out only a few extra points despite your best efforts. There’s really no point, anyway, since you’re already qualified for the best rates and terms. Here’s one area where it’s really OK to rest on your laurels and worry about something else.
By Liz Weston
Liz Weston is the Web’s most-read personal-finance writer. She is the author of several books, most recently “The 10 Commandments of Money: Survive and Thrive in the New Economy.” Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money.