Credit Repair

10 Steps to Better Credit This Year

How to Improve Credit Score

Your credit score is a risk score that creditors use to decide whether to lend to you and at what interest rate. Improving your credit score can help you qualify for the most competitive auto loans, personal loans and mortgage products. In this guide, we break down steps you can take to improve your credit score this year.

Your step-by-step guide to better credit in 2019

Increasing your credit score won’t happen overnight. It’s a process. With that said, following the steps below consistently can help your score trend upward over time.

Step 1: Check your credit score

The first step is checking your credit score to see where you stand. You can grab your credit score for free by signing up for a My LendingTree account. My LendingTree gives you the VantageScore 3, a credit score created in 2006 by the three credit bureaus — Experian, Equifax and TransUnion.

The FICO® scoring model, first started in 1958, has been around longer and is more widely known. A FICO Score is usually not free. But some credit card companies and banks now offer products that include free FICO Score monitoring.

Bank of America®, Citibank®, Discover and Wells Fargo® are all examples of financial institutions that offer free FICO Score updates. If you want a true FICO Score, check with your bank or credit card company to see if you can get it for free before purchasing a score from myFICO.

After checking your score, write down a goal for how much you want to increase it. According to Experian, here’s the FICO Score breakdown:

  • Excellent: 750 to 850
  • Good: 700 to 749
  • Fair: 650 to 699
  • Poor: 550 to 649
  • Very poor: 300 to 549

Ask yourself: Where do you fall now and where do you want to be?

Step 2: Pull your credit reports and circle negative items

Credit scores are calculated using data from your credit reports. To improve your credit score, you need to clean up negative items and increase the number of positive records in your report.

You’re entitled to one free credit report from all three credit bureaus annually. Grab your free credit reports at AnnualCreditReport.com. Print out the reports and circle negative items that could be impacting your score.

Double-check that the negative items on your reports are accurate. Errors on your reports may affect your credit score. Getting these negative items removed can give your score a boost.

Step 3: Dispute negative items

If you find inaccuracies or an incomplete record, you should dispute the records with each credit bureau that’s reporting the error. Each credit bureau has an online dispute process, but the Federal Trade Commission (FTC) recommends that you write and mail your dispute.

The dispute you mail should include a package of information. First, write a letter explaining the errors you found. The FTC has a sample dispute letter that you can use here. Attach copies of your credit report with the errors circled. Add to the package copies of statements and proof of payment that back up your case.

Be sure to send a copy of the dispute package to the credit bureau and the entity that reported the error (i.e., the credit card company, lender, etc.). The credit bureau has to investigate the claim unless it’s found to be frivolous. You should hear back in about 30 days. If an error is found, the report from each credit bureau should be updated. You should follow up to make sure each correction is made.

What if all of your negative records are accurate? You can still try sending a letter of goodwill to your creditor asking for a removal of a late payment. A letter of goodwill is where you take ownership of the late payment, explain why it happened and request for it to be removed.

Step 4: Calculate your credit utilization

The most important factor that impacts your credit is your payment history, so fixing inaccurate, poor payment history is crucial. The second factor that has the most impact on your score is “amounts owed.” A high amount owed can be a sign that you’re having a bit of financial trouble.

Credit utilization is an important part of the amounts-owed factor. Credit utilization is a ratio comparing how much revolving credit you’re using. You calculate your credit utilization by adding up your revolving credit card balances and dividing that sum by your credit limits.

For example, say you have $10,000 on Credit Card A and $4,000 on Credit Card B. Credit Card A has a $20,000 credit limit and Credit Card B has a $5,000 credit limit. Your credit utilization in this scenario would be 56%. Ideally, your credit utilization should be below 30%. Lowering your credit utilization can improve your score. We’ll talk about how you can lower your credit utilization next.

Step 5: Request a credit limit increase

There are two ways to decrease your credit utilization — increase your credit limits and pay off debt. Let’s first discuss increasing your credit limits.

Creditors may be willing to increase your credit limits if you have decent credit and a history of keeping up with payments.  Some credit card companies allow you to request a credit limit increase in their online account dashboard. For other credit card issuers, you need to make the request over the phone.

The application for a credit limit increase may require a hard pull on your credit, which could ding your credit score a few points. But the overall benefit you see from a decreased credit utilization because of a credit limit increase could be worth the loss in points.

Word of warning: Increasing your credit limit isn’t an excuse to go crazy and start racking up more debt. The sole aim of this strategy is to reduce your credit utilization. Using the newly available credit will defeat this purpose, and it could potentially hurt your score even more.

Step 6: Write down your debt repayment plan

The second way to decrease your credit utilization is paying off debt. Look at your current debt payments to all creditors. Are you paying just the minimum? Can you adjust your spending in other areas to put more money toward debt payments?

Pull out your budget and redistribute money from other budget line items to debt payments where you can. Think about putting the money you earn from bonuses, commissions or side hustles toward payments as well.

Think twice about using your savings to repay debt. You should keep your rainy day fund intact to cover emergencies that arise. If you use savings for debt, you may find yourself swiping the credit cards again or using other debt vehicles to make ends meet.

Step 7: Automate the debt repayment plan

Automating each part of your financial plan — investment contributions, savings deposits and debt payments — can make reaching your financial goals nearly effortless. Instead of relying on yourself to remember (or be motivated enough) to pay off debt each month, your bank can automatically make the debt payments for you. Schedule monthly automatic debt payments, then sit back while the debt plan works for you.

Step 8: Become an authorized user

Becoming an authorized user is a way to piggyback off of someone else’s stellar account history. As an authorized user, their account with excellent payment history may show up on your credit report to give your score a boost.

One caveat to this is that not all credit card companies report payments to the credit bureaus for authorized users. Contact the credit card issuer before the account holder adds you as an authorized user to see if the account will appear on your credit report.

Step 9: Have your rent payments reported to the bureaus

Consistent on-time payment history is the key to building good credit. Rent is something you have to pay consistently every month. Why not have it count positively toward your credit history?

Not all landlords or property management companies report payments to the credit bureaus. Ask your landlord or property manager to see if they can report payments for you. If not, there are rent payment systems that will report your payments.

RentTrack is an example of a rent payment system that reports payments to all three credit bureaus. But there are fees involved. For RentTrack, the service fee is 2.75% for debit card transactions, 2.95% for credit card transactions and $6.95 for Automated Clearing House (ACH) transactions.

Step 10: Take out a credit-builder loan or a secured card

Credit builder loans and secured cards are tools that can be used to build or rebuild credit. Building credit is a Catch-22. You need credit to build credit, but creditors may not be willing to lend you money when you have some not-so-great history. If you’re starting from scratch or trying to bounce back after an adverse credit history, one of these two products can help.

A credit-builder loan is a product where the loan funds are put into a savings account. You make payments toward the loan until it’s paid off. The lender reports your payments to the credit bureaus. On-time payments will help you build positive credit history and you get the lump sum from the savings account after you pay the loan off.

A secured card is a card where you put a cash deposit down as security for the money you borrow. Put a small balance on the secured card and pay it off in full each month to keep your credit utilization low. Payments get reported to credit bureaus to help you build a credit history. The goal is to transition from secured card to an unsecured card after proving you can keep up with payments. Shop for secured cards in our roundup.

Final word

Improving your credit takes time, but it’s doable. Each of the steps above are ones you can take this year to make progress. Stay on top of payments and take steps to keep your balances low. Make it your goal to do these two things consistently, and you’ll be well on your way.

Fees menitoned in this article are accurate as of the date of publishing.

 

Looking for ways to increase your credit score? Get a free credit consultation today!