Wednesday, December 26, 2007

How to improve your credit score

So you've had a less than stellar couple of years. Maybe you were irresponsible with your finances. Maybe a life altering emergency came out of the blue and threw your life into disarray. Or maybe you've even married someone who happens to not like paying their bills fully and on time. It happens to everyone once in awhile.

Even though you're a better person because of it, those misadventures are still going to be an ugly stain on your credit report. How long? Well, it'll of course depend on how bad the situation really got and exactly what happened, but chances are it's in the neighborhood of 7 years. Maybe even longer if something exceedingly stupid happened.

That's a long time. If those credit report stains occurred when you were 23, they'll still haunt you until you're in your 30s.

Even if your balances get paid off in full, on time (eventually...), the period you were delinquent in will still haunt you. Simply being late on payments is enough.

So truth be told, if the blemishes on your credit report are factual (meaning you actually did blow off paying American Express for 8 months), there's no way to remove them. Sure, there are a number of shady corporations out there who claim to make your credit report squeaky clean. But they're not even going to want to talk to you before they have a hefty consultation fee in their pocket.

And guess what? That's all that's going to happen, you giving them your money. They'll say they'll make everything better, but they won't. If you have bad credit for whatever reason, no one can eliminate your history.

You earned that metaphorical scarlet letter, and you're going to have to wear it until it either disappears after 7+ years or you're going to have to take matters into your own hands. Right now.

The latter is of course the most preferable.

So how does one go about proving themselves to be a good little consumer, worthy of a mortgage, car or small business loan? I've come up with a small list of things to improve your score. This is by no means a tell all of tell alls. There are many ways. You'll never be stuck in the same spot forever. There are always steps you can take to repair the damage, even if you can't erase it altogether.

Have I missed something? Say so in the comments and I'll gladly link back to your blog in my next post!

  • Deal with your current problems: Deal with all outstanding debts as quickly, politely and efficiently as humanly possible. Funnel every spare dime into this task. The longer you put off a payment, the more damage you're causing. If possible (and only if possible) consider paying off your big financed debts with more than your monthly due. In example, you owe $500 this month on your car, but you still have $8,000 left until the car is fully paid off. Send them $650 for this month if you can spare it after your other expenses and savings account.

  • Keep your job: Few people realize this, but your employment is also taken into account when you apply for a credit card or loan. Ideally lenders look for 1+ years of employment at a place of business. This shows them you have job security and you'll be able to make your monthly payments on time.

    A good trick for this if you regularly find yourself out of work (i.e. you're an independent contractor, you work seasonally, your job market is experiencing a downward trend, et cetera) obtain a part time job and stick with it.

    Even if you work 5 or so hours a week on occasion, you'll still be able to put it down as income. And once you hit a year you'll be golden, so long as you stick with it.

  • Stay put: Another aspect that's looked at when you apply for a credit card or a loan is how long you've lived at your current residence. Has it been 18+ years? Has it been a week? A dirty trick those with serious issues like to pull is racking up a debt and then skipping town.

    So the longer you've lived someplace the better of you'll be. Just remember to pay your rent / mortgage on time while you're at it. They may contact your landlord / lender to verify your status.

  • Enroll in a secured credit card program: I cannot stress this enough, do not even consider this until you are looking to rebuild. If you have an addiction to plastic, credit and impulse buying, wait until you've over come those demons before even thinking about this. While it's harder to get yourself into trouble with this, it is still possible.

    In a nutshell, a secured credit card is a lot like renting an apartment. You pay a security deposit in addition to some (usually small) annual fees. The amount of your security deposit directly reflects your credit line. If you mess up, poof. Your deposit has been funneled into your payment and your credit line is zero.

    Credit companies offer this specifically for people looking to build or rebuild their credit. It allows you to show yourself capable of acting responsibility with less risk to the lender.

    Just remember to pay off your balance in full every month. And shop around for the secured credit card that suits you best. (Read more...)

  • Take out a small secured loan: A secured loan is essentially the same as a secured credit card, just bigger. Just remember, the bank is giving you a chance. Don't ruin it, or you'll find yourself without the collateral (your car, home, boat, et cetera) and another bad mark on your credit report. (Read more...)

    Always pay your balance due in full, on time without fail. This will do wonders for your credit score.

  • Pay off all of your debts: Yes. Even the ones who have written you off as a deadbeat. Your efforts will be appreciated and they will reciprocate by improving your score.

  • Consider keeping some credit cards: After everything is said and done and you've definitely over come your spending demons, consider keeping a couple of the better credit cards active with zero balances. This may help.

    But to remove all possibility of abuse keep them at home, away from the computer.

  • Double check your work: After you've handled everything obtain a copy of your credit report (preferably for free). You can do this if you've been denied for a loan or a credit card by contacting the rejecting party and requesting it within a reasonable time frame. They must comply. This is U.S. law.

    Or you can visit This website is run by the three major credit reporting corporations. You may obtain a copy of your report for free, once every 12 months.

    Look it over. Do you see anything that's odd? Mistakes are not unknown. Someone may share your name, your identity could have been stolen at some point, your guardians could have unethically used your name in place of their own, et cetera. Dispute the inaccuracies. Rectify those you've missed.
It's quite surprisingly not a large hurdle to over come. You just have to apply a fraction of your brain power and time to the subject and you'll be on easy street should that be your destination.


the1chery said...

"The ladder is of course the most preferable."

I'm looking through your whole post trying to figure out what 'ladder' you're talking about. then it dawned on me. you meant LATTER. as in former or latter. no offense, just helping the masses understand. by the way, i enjoy your blog. :) you have a lot of good ideas.

Ed said...

I really should proof read my articles a second (or maybe third..) time before posting. I make a lot of stupid mistakes like that.

Thanks for the heads up and kind words!

Anonymous said...

You would be surprised how important having a long term job is to a lot of applications. i was denied a car loan a year ago because I just had started a new job. it even made more. Chase didn't seem to care.

Lisa said...

Thanks for the advice. I'm climbing out of a hole too.

daniel said...

i enjoy your blog too. ;)

Ed said...

Lisa: Good luck! Sometimes that hole can be a very deep, slippery one.


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