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splorp! the Evil Bastard’s Web Site O’ Doom -
How to Improve your Credit Scores - July 2, 2007

I've had quite a few people ask what they could do to improve their credit scores. OK, most of them were people who wanted to refinance out of their horrible high rates, adjusting ARMs, Interest Only or Negative Amortization loans but had credit scores in the low 500s. Yes, this was during my time as a loan officer.

Credit scores, whether you refer to them as Beacon Scores (from Equifax Equifax in new window, FICO scores (both TransUnion TransUnion in new window and Experian Experian in new window) or just generically as credit scores, are based on several different factors. They range from 300 to 850, depending on the bureau in question. Based on my experience in the mortgage industry, anything under 500 is considered almost completely uncreditworthy. This doesn't mean you can't get a loan, just that the rates you may be offered will be exceptionally high. 620 is the minimum score for prime rates (low end), while anything above 760 will usually get you top rates. Remember, the credit bureaus keep their specific algorithms secret, so these suggestions are based wholly on my experience.

The first 2 steps are primarily concerned with obtaining credit, the next with improving an existing score.

Step 1 to improving your credit score: get some credit. If you cannot get a standard VISA or MasterCard, apply for either a gas card or a store card. Most banks also offer secured VISA or MasterCard cards, based on money in either a savings or checking account. You can also buy something on credit, such as furniture, a big ticket appliance or electronic device. If you go the latter route, make sure that the payments extend for at least 13 months and do NOT pay it off early. You need to show that you can make on time payments over an extended period of time. Quite often, you will begin to receive offers for other cards once you've made several payments on the purchased item. Be choosy at this point. You really need no more than 3 credit cards, plus any miscellaneous store cards.

Step 2 to improving your credit score: make your payments on time. All of them. Every time. This is not an option. If you have to drive a hunk of junk car, drive it. If you have to not go to the movies, don't go. If you have to pack a lunch every day instead of eating out, pack it.

I've seen so many people complaining that their credit score is horrible and they can't qualify for anything good because they can't make all their payments. The thing is, I see them complain with a $40,000 car parked in front of the bar at which they're sitting, drinking a $7.00 drink (or two or three) and wearing $200 shoes while eating a $10.00 appetizer while waiting for a seat for their $100.00 dinner. Don't whine. You want to get a house with a decent interest rate? Live within your means. Complaining isn't going to help. DO something about it.

A lot of people recommend paying off your balance in full every month. Once your credit score has reached the range you wish, do so. While improving your credit score, carrying a balance will actually help you, as long it is less than 50% of your available credit and you make at least the minimum required payment.

Step 3 to improving your credit score: keep following step 2. In addition to that, confirm that you never use more than 50% of your available credit. To clarify, if your credit limit if $1,000.00, charging more than $500.00 will hurt your credit score. This refers to the TOTAL amount of available credit, not each individual card.

Step 4 to improving your credit score: review your credit reports for errors and bad marks. Mistakes do happen. If you discover an error, the first thing you should do is contact whichever company has reported the error. Do this via certified mail. If they do not respond, contact the bureau reporting the error and advise the company is not responding to your inquiry. Each bureau has their own procedure for reporting the error. Normally, this involves contacting the reporting company for verification. Remember, the entire process can take between 30 and 90 days, which is why you should review your credit report at least once per year.

As for bad marks, fix them. If it's legitimate, pay it off. Remember, using a company that negotiates a lower payoff amount will not always be in your best interest. It CAN be, in some cases, so do not discount that option immediately. First, you should contact the company yourself directly and try to negotiate a payoff. Make sure they understand that you want "PAID IN FULL" or "PAID AS AGREED" marked on the account once you've paid them. Other notations besides paid in full or paid as agreed can leave the score where it is (or worse, cause a score drop). If you have tax (or other) liens on your credit report, get them paid off. GET AND SAVE THOSE RECEIPTS! You may have to prove that you have paid off liens to multiple parties, especially if you are trying to buy or refinance a car or house. Tax liens are notorious for coming back after being paid. Your receipt is your only proof in most cases. Some companies will, upon request, remove a single 30 day late reporting from your credit report. All it takes is a request. There's no guarantee, but it is always worth a try. You're unlikely to get anything removed if you are not current on the account.

Step 5 to improving your credit score: maintain! Once you get your score where you need it, keep everything up. Do NOT cosign for anyone unless you can make the payment yourself. Remember, cosigning means that any negative marks caused by payments on that debt impact YOUR score equally. I've seen quite a few people brought down by cosigning for a child or a sibling or a cousin.

Do NOT make any payments late. Remember, unless your payment is more than 30 days late, it should not appear on your credit report as a negative flag. In other words: a late charge does not necessarily hurt your credit score.

You should (almost) never cancel a credit card. You need to maintain a long credit history. The longer, the better. There are two exceptions to this rule. Exception 1: annual fees. Never pay an annual fee. If you have to begin your credit history by accepting a card with a fee, fine. Renegotiate this once you've established your credit. If they won't budge, cancel it. Tell them you want it noted that it was cancelled at YOUR request. This leads to exception 2: if the card issuer advises that they are going to cancel your card, contact them and CANCEL IT BEFORE THEY DO! They are a few ways that accounts are noted as closed on your credit report. These include "Paid in Full," "Paid as Agreed," "Account closed by credit issuer/grantor," and "Account closed by Consumer." These phrases will vary slightly depending on which bureau you are reading, but those are the general types. Paid in Full is generally used for a fixed payment item, like a loan. The last two are used generally by credit card companies. It is ALWAYS better to close an account yourself than to let the creditor close it for you.

Don't keep applying for credit! Every time a "hard" inquiry is made on your credit report, you will see a small drop in your score. A "soft" is what you get every time you get a so-called pre-approved credit card applications in the mail. These inquiries do NOT impact your score. You should shred these applications when you receive them as they can be used for identity theft.

These suggestions are based strictly on my experience as a loan officer and customer service representative with one of the largest mortgage companies in the world AND based on my own experiences and high credit scores. They have not been evaluated by any financial expert and are presented only as an example of what may improve your credit score and are not a guaranteed method of improving said score.

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