Many people suffered blows to their credit scores during the unstable economy of the last few years, whether because they missed payments, exceeded credit limits, or, more seriously, experienced a home foreclosure or even bankruptcy.
If your credit score drops significantly, you'll likely be charged higher loan and credit card interest rates and offered lower credit limits – or perhaps be disqualified altogether. And, lower scores can also lead to higher insurance rates and harm your ability to rent an apartment or get a cell phone.
Fortunately, taking these few steps will begin improving your credit score almost immediately:
First, review your credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion) to see which negative actions your creditors have reported and look for errors or fraudulent activity. You can order one free report per year from each at Annual Credit Report . You can also order a FICO® credit score (the score most commonly used by lenders) for $19.95 from myFico to know exactly where you stand.
"It definitely pays to have a good FICO score," says Greg Pelling, vice president of Scoring and Analytics at FICO. "Based on today's rates, you could save $30,000 in interest on a $100,000 home loan over 30 years, if your score is above 740 rather than below 620. Lenders base their decision on many factors, but your FICO score plays a major role."
Never exceed individual credit limits. In fact, the lower your credit utilization ratio (the percentage of available credit you're using), the better. Try to keep your overall utilization ratio – and ratios on individual cards and lines of credit – below 30 percent.
Even if you pay off your balance each month, showing a high utilization ratio at any time during the month could conceivably hurt your score. A few suggestions:
Transferring balances to a new credit card to get a lower rate lowers your credit score by a few points – although it won't take long to recover.
But, say you move a $2,000 balance from a card with a $10,000 limit
to one with a $4,000 limit – you've immediately gone from a 20 percent utilization ratio to 50 percent
on the new card.
A few other credit score improvement tips:
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a tax, or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.