This is a multi-part guide to helping you raise your credit score, understanding how your credit score is modeled and helping you create a gameplan to improve your score over time.
Feel free to ask questions and I will help. Maybe this thread can help people track their progress.
What is my credit score?
Your credit score is nothing more than how good are you at being in debt.
Why is it important?
Your credit score (usually the FICO score) and your income help determine how much credit and what interest rate you will be able to get. It drives your ability to buy a house, get a car loan, and buy cool expense toys interest free.
Why should I listen to you?
Three years ago I decided to actually start caring about my score and what it might take to raise it so I could purchase the things that my income was affording me. I had, had one credit card in college that I basically paid on for awhile and then gave it the middle finger and didn't think twice about it. Once I wanted to get a car loan I was denied, and figured out that I needed to build and repair my credit.
Starting in August 2009 I had between a 590-620 credit score at all three credit agencies today I have a credit score of:
What makes up your credit score?
Open Credit Card Utilizatoin, Percent of On-Time Payments, Average age of Open Credit Lines, Total Number of Credit Accounts, Number of times requesting credit in the last two years, Derogatory Marks (collections, bankruptcies, liens, etc).
Below I detail the process to take to raise your credit score. This is not an overnight solution but if you are committed within a couple years your score will increase significantly.
Step 1 - Take care of the old stuff.
The first thing you need to do is go to AnnualCreditReport.com and request the free credit report from each agency. You can do this once a year and it will give you a detailed look at everything that is on your credit report. Second go to CreditKarma.com and sign-up (it's 100% free) this will be what you use to monitor your credit going forward.
Look through these reports, make sure everything on there is accurate. If there is an error you need to dispute this with the credit agency. There are many excellent places online that will help teach you how to write a dispute letter, Google it.
Now you need to figure out what is in collections or late that you need to make plans to pay off. First you need to look at your credit report and figure out when you first began to have late payments. That first late payment is when the magical 7 year clock begins. Negative credit items fall off your credit report 7 years after they began. The debt never goes away (although the ability to collect on it may, timelines vary by state) but it will fall off your credit report. If something is 6 years or older since you first went late, don't make plans to pay it off until it disappears from your credit report.
Everything else you need to call and setup a payment plan or pay in full. This is going to be the hardest part of the whole process, it's not fun dealing with creditors, they are pricks. You should generally negotiate to the original debt owed and try to eliminate all accured interest. Make sure your setup plans that you can afford to pay monthly and never miss a payment!
Step 2 - Secured Credit your friend for the future.
If you have credit cards already you need to get your balance down to between 1% and 20% of the cards limit. You do not need to actually carry the balance month to month (meaning you don't need to collect interest). If you make payments in full and your utilization is between 1 and 20% you are good to go.
If you do not have a credit card already let me introduce you to how you are going to build credit. It's called a Secured Credit Card (I like Wells Fargo and US Bank's). This is a card where you basically submit a deposit and that is your credit limit. It is called Secure because if you don't pay they just take it from your deposit. Yes, you can get your deposit back if you ever close the card, and many cards will give you the deposit back in the future and roll you into a traditional card. What I would suggest is opening two cards, with $500 credit limits each. You are going to make charges between that 1% and 20% utilization each month and you are going to pay it off in full. They will then report your on-time payments to the credit agencies and your credit score will start to go up.
Step 3 - Buliding Blocks for the Future
Always use your card every month, zero balance is worse than a low balance. Remember you can pay in full and not pay any interest.
Keep your credit card utilization between 1% and 20% always!
Always pay on-time, even if it is the minimum.
Never close credit cards, the age of your open credit lines is a big determining factor of your score. We are going to take an initial hit by opening secured credit cards, but in the long run you want to keep these open.
Don't apply for lots of credit. Generally you don't want more than 2 Hard Credit Inquiries every two years. A hard credit inquiry is the actual request for Credit. 1 per year is perfect. So in general you aren't going to apply for a house and get a car loan in the same year. Don't use shady loan companies, sometimes you can end up with 10-20 requests because they sell your information to all these different companies that then do a hard inquiry on your credit.
The more credit accounts you have over time the better your score. Remember that length of credit is important but so is the number of accounts. Generally it is a good idea to have 7-10 things on your credit score. For most people this could mean a house, a car (or two), a couple credit cards, maybe a student loan or two.
Dregatory Remarks - This is simple your credit score doesn't like collections, liens, bankruptcies....avoid it in the future.
Types of credit - You need to have both installment debt (mortgage, car, student) and revolving debt (credit card).
If you have specific questions about your situation feel free to post it or shoot me a PM and I will give you feedback.
Reply With Quote
Originally Posted by BeerAndPoker
