Tips to Improve Your Credit Score

A credit score is a complex mathematical model that evaluates many types of information in a credit file. A credit score is used by a lender to help determine whether a person qualifies for a particular credit card, loan, or service. Most credit scores estimate the risk a company incurs by lending a person money. Generally, the higher the score, the less risk the person represents.

Lenders place a lot of emphasis on credit scores when evaluating whether or not they are going to approve a mortgage application. With that said, it does not mean that if you don't have a high score you won't be able to find financing (see previous post re FHA mortgages). Here are a few tips to help improve your credit score.

1. Review your credit report. Did you know that you are entitled to one free credit report every 12 months from each of the three credit bureaus? AnnualCreditReport.com is a FREE service that will allow you to pull reports from Experian, Equifax and TransUnion. It is important to look at all three agencies and to review each report for accuracy. It is not unusual to find a mistake or incorrect information.

2. Report credit report mistakes. If you find an error, you should file a dispute to correct the inaccuracies. The credit bureaus have procedures to follow that you can find on their website.

3. Pay EVERYTHING on time! This is so important as your payment history accounts for approximately 35% of your credit score. Even if some months you can only make the minimum payment, make sure it gets to the creditor before the due date.

4. Don't cancel those credit cards! Pay off your balances yes, but then keep the card open. This will increase the length of your credit history. Frequently opening and closing accounts can lower your score.

5. Keep credit card balances low. Even if you pay off your cards every month, a high average balance will impact your score. It’s better to have several credit cards open with low balances (i.e. 25% of your available credit) versus one card with a high balance.

6. If you're having trouble paying your bills, contact your creditors immediately. Tell them why it's difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don't wait until your accounts have been turned over to a debt collector. At that point, even if you pay off collection accounts it will remain on your credit report for seven years.

7. Don't keep opening new credit cards in order to "build up your credit." Every time a lender runs a credit check on you, an inquiry is recorded. The more inquiries, the lower the score. Again, lenders look at length of credit history so keeping a paid-off card open is more important than opening up new lines of credit.

8. Beware of credit repair scams. Don't do business with any company that:

* Wants you to pay for credit repair services before any services are provided;
* Does not tell you your legal rights and what you can do yourself — for free;
* Recommends that you not contact a consumer reporting company directly;
* Suggests that you try to invent a "new" credit report by applying for an Employer Identification Number to use instead of your Social Security number;
* Advises you to dispute all information in your credit report or take any action that seems illegal, such as creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.