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7 steps: Clean up your credit by spring

By  |  Published: January 5, 2017

Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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New home or other major purchase coming up this spring? If so, the time to start shaping up your credit score is now. Unlike slimming down at the gym, a buffed score doesn’t have to cost anything or even require getting up from the sofa.

Simply changing how and when you apply credit card payments, along with knowing when and when not to open new accounts, can lead to many of the finer things a better credit score brings – smoother credit approvals, lower loan payments, less credit card interest, and even, as you’ll see, bragging rights.

Start this seven-step plan now by adapting it to your own unique situation and see an improved credit score by springtime:

Step 1: Get your free credit reports, review them thoroughly and dispute any inaccuracies.

Begin by getting your credit reports from the three major credit bureaus – Equifax, Experian and TransUnion – via annualcreditreport.com. Review thoroughly, checking closely for errors. Just one negative item not belonging to you – a past-due payment, collection or public record (judgments, tax liens, bankruptcies) – can land your score far lower than where it should be.

Unfortunately, the burden for correcting reporting errors lies with the consumer. For a better score by spring, you’ll want to dispute any errors now and allow about 30 to 45 days for investigations to be completed.

Step 2: Sign up for free monthly scores, pay attention to what’s helping and hurting, and keep track of your progress.

Wonder how a creditor will view your creditworthiness? Start checking your credit score monthly from one of the many credit cards providing free scores. Credit education sites also provide free scores. Or, if you have a credit card from one of the major banks, you may already be receiving FICO scores on your monthly statements. Since the FICO brand of scores is used in more than 90 percent of lending decisions, follow them each month if possible. The other major score brand, VantageScore, tends to be featured on websites offering free scores, uses the same 300-850 score range as FICO, and works similarly. CreditCards.com's free service My.CreditCards.com provides free VantageScores.

Step 3: Get caught up and stay caught up on all payments, or seek help from a credit counselor or bankruptcy attorney.

Past due on any bills? Catching up on payments isn’t just the best advice, it’s the only advice! Falling behind on just one payment can drop your score by more than 100 points and haunt your score for seven years. Should you find yourself in over your head debt-wise, either contact your local nonprofit consumer counseling agency about a debt management plan or speak with a bankruptcy attorney.

Step 4: Pay down all highly utilized cards to below 50 percent, while making just the minimum on other loan payments.

Maxed out, or close to it, on any cards? Make paying down high balances your top goal. It’s a fact that consumers with high card balances are more likely to miss future payments than consumers with low or $0 balances. Whereas loan balances matter little to the score, lower card balances generally lead to lower credit utilization (balance/limit percentage), which leads to a higher score. For this reason, aggressively pay high card balances down while making just the required payments on mortgage, car or student loans. A good rule of thumb for consumers with excessively high card balances is to reduce all balances to under 50 percent of the credit limit.

Step 5: Further boost your score by applying the highest payments to the most highly utilized cards, with an eye toward eventually paying balances in full each month.

Not maxed out, but paying too much interest? No matter how much card debt you owe, you can usually help your score by lowering your balance-to-debt ratios, starting with the most highly utilized accounts. The ideal credit utilization percentage ranges between 1 and 9 percent. So start by getting your utilization ratio below 50 percent. Next, set your sights on getting it down to single digits. Pay balances in full when possible to reduce and eventually eliminate credit card interest.

Step 6: Pay card charges before the next statement date to reduce the balance reported to the credit bureaus and lower your utilization even further.

By now, you have a good score, but why stop there? The very best rates and perks go to those with the highest scores. This is where the bragging rights come in. There’s certainly nothing wrong when your mortgage broker says “Wow!” when that 820 score appears on the screen. While an 820 score may not deliver any better credit terms than a 760 would, but it could get you invitation to enjoy the perks and status of a high-end, high-benefit credit card.

There is a way to help you get to this scoring stratosphere when you’re already paying in full each month. Start paying early for recent charges so that you owe as little as possible on the following statement date. Your balance as of this date is the amount reported to the credit bureau and used along with your credit limit in utilization calculations.

Step 7: Open a new secured or unsecured card account to increase your proportion of good to bad accounts and/or lower your credit utilization.

Stuck with multiple accounts showing past late payments? Have some high utilization that’s more from too-low credit limits than excessive spending? In either case, and assuming you’re not going to be applying for a mortgage this year (lenders look negatively at newly opened credit), consider applying for or accepting an offer for a new credit card. When added to your credit report, and absent any balance increases, either a secured (for low- or no-scorers) or unsecured (for good scorers) card can add a few points to your score by:

  • Increasing the proportion “good-to-bad” accounts on your credit report when more than one or two accounts include a history of late payments.
  • Lowering your utilization by adding to the available credit (numerator) portion of the utilization calculations.

Whether the future will bring a new home, car, credit card or simply a new set of bragging rights, adopting these seven steps now can have you on course for a better credit score.

See related:  Charge a lot? Pay often to keep score high

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Updated: 05-26-2017

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