Improve Your Credit Rating
Improving Your Scores
You really can boost your FICO score and clean up your credit report, though it takes time. Bankruptcies stay on your credit records for 10 years, and judgments, liens, arrest records, and similar items for seven years, no matter what. But you can significantly improve your credit even before those black marks vanish: In only three or four years, even people who've filed for bankruptcy can raise their score to levels that will qualify them for near-premium interest rates from lenders.
The most important move you can make to boost your FICO score and clean up your credit report is to pay your bills on time. "Prompt payment of your bills is crucial to creating and maintaining a good credit score," said William Haynes, an attorney with the FTC. Although you can't make missed payments go away, you can resolve to stay current. And while the longer you show a good payment history the better your score will be, keep in mind that your recent history carries more weight than your more distant past.
As you work on your score, be strategic about how you plan your payments. In general, it's more important to make your current minimum payment on time than it is to send a large check that's already overdue. But paying down your debt balances always helps your score, so if you're fortunate enough to come across a windfall, use it to pay your highest-interest debt first and work your way down. Prepaying an installment loan such as a car loan won't necessarily save you in interest, so concentrate your efforts on your expensive credit cards. High outstanding debt can lower your score, since scores take into account how much of the credit available to you you've used -- being "maxed out" is a red flag. It can be worth it to expand your credit limit on existing cards -- as long as you don't use that extra money. Ideally, you should be aiming not to use any more than 30 percent of all the credit available to you.
Avoid applying for more credit. It's tempting to move your balances to new credit cards to take advantage of lower rates, but beware. This can actually lower your score because you'll have more open credit card accounts. It's better to have fewer cards in good standing, and the older, the better.
If you do need to look for new credit, focus your search in a narrow time period. When you apply for credit, lenders will check your credit history. These inquiries appear on your report, and too many inquiries can be a negative for your credit score, which looks at the length of time in which inquiries are made to determine whether you've just made one search -- or many.
Originally published in Ladies' Home Journal magazine, April 2006.