3 Ways to Improve Your Credit, Free of Charge
As a numerical representation of how well we manage our finances, our credit score is like a grade point average. It’s computed as a weighted average, with certain categories — like payment history and the amounts we owe – holding the most weight. The more diligent we are in maintaining good financial habits, the better our score.
Why should you care about your credit score? As obvious as this question seems, the self-evident nature of this question is not reflected within credit score data. According to data published on Credit.com, the average Fico score was around 689 as of late 2012. This is only a fair score, and it’s in a range where you can receive a loan from a lender with acceptable terms. You may be able to refinance your mortgage, buy a car, and open up a line of credit. With this score, however, you will not get the same rates as a person with an excellent score of above 750.
If someone offered you $10,000 today and in exchange, you had to pay them back $11,325 over the course of five years, you may consider taking such a deal. However, if instead of $11,325 you had to pay them back $17,610, you may have second thoughts. This is the type of difference interest rates can make, but when you hear amounts in terms of installment payment amounts instead of total amounts, the difference doesn’t sound nearly as remarkable. Six thousand dollars sounds like a lot more than $20 more per month.
Think of it this way: When you open a checking or money market account, you receive interest on your money, and the higher the rate, the better. With a credit card (and most loans), you are on the opposite end of that transaction — you are the one paying the interest, in that same manner, to the company. You can lower your rate and pay less in interest by improving your credit, a factor within your control.
Oftentimes, damage to credit occurs when you are young and have not yet become completely financially established. Sometimes, job loss, illness, divorce or other situations resulting in financial strife can cause credit to drop. Regardless of the reason, credit is not something that you can repair overnight. That is, you cannot take your score from a 500 to an 800 in a week. You can, however, take certain measures to improve your credit that will have a relatively immediate impact.
1. Know your rights wnder the FCRA
If you know your Fair Credit Reporting Act rights, you can stay one step ahead of the game. According to the Federal Trade Commission, “the federal Fair Credit Reporting Act (FCRA) promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies.” Such agencies include the three credit bureaus — Transunion, Equifax, and Experian — as well as specialty agencies, such as those that deal in medical records, check writing history or rental history records.
The FCRA says these agencies have to act ethically and responsibly, and that you, the consumer, have rights that protect you against unfair practices. For instance, you have the right to know what is in your files and if any such information is being used against you. If a business is going to deny you credit or employment based on information from your credit report, you have the right to know which agency provided the information to the business.
Most people receive offers for credit cards, auto loans, and other credit offers in the mail. If these offers are a temptation for you, you can limit those “get a low APR card today” offers by calling the toll-free number 1-888-5-OPTOUT. If you opt out, it will stop most of the junk mail offers asking you to open up new lines of credit.
The FCRA also protects your privacy and your reputation. Access to your credit file is limited, and only those with a valid need may view your credit information. For an employer (or prospective employer) to view your credit, you must first give consent for this to take place. Additionally, any information on your credit file that is incorrect, incomplete or unverifiable must be corrected or deleted by the reporting agencies, usually within a 30-day time frame.
If you have any bad marks on your credit report that are incorrect or inaccurate, contact both the credit reporting agency and the creditor and explain the situation. Along with your explanation, include any documentation you have that proves these marks need attention. Ask that the creditor remove these negative marks based on your records. If you are a loyal customer with a long-term relationship with a creditor, a creditor may forgive late payments resulting from financial hardship in some cases. Lifehacker describes this as a goodwill adjustment. Of course, this is not something you can do on a repeated basis, but some creditors will forgive late payments if they are a onetime occurrence.
2. Dispute anything that doesn’t seem right
Under the FCRA, you also have the right to dispute any items on your credit report that are either incomplete or inaccurate. Additionally, outdated information — such as most accounts more than 7 years old and bankruptcies more than 10 years old — should not be reported to credit bureaus. Nothing is perfect, and outdated information sometimes erroneously remains on your report and impacts your credit.
If you see information like this on your credit report, you can dispute it by writing to all three credit bureaus and the company that reported the debt. Again, include copies of any supporting documentation, your complete name, and address. Clearly and factually explain which items you are disputing and why, and send all of the information via a certified letter.
Here is Experian’s list of common information on a credit report and how long it should remain:
- “Open accounts with no negative payment history: remain indefinitely as long as they are open and active.”
- “Closed accounts with no negative payment history: remain 10 years from the date they are closed. Positive accounts remain on your credit report longer than negative accounts.”
- “Late payments remain seven years from the original delinquency date. A single late payment is deleted at seven years. If there was a series of late payments (not paid at 30 days, or 60 days, or 90 days) and then brought current, the payments would be deleted seven years from the first one missed in the series. If the account was never brought current and charged off and placed for collection, the entire account will be deleted based on the date the account became late and was never again current. This is known as the original delinquency date.”
- Collection accounts remain seven years from the original delinquency date of the original account. Collection accounts are treated as a continuation of the original debt and are deleted at the same time.
- “Chapter 13 bankruptcy is deleted seven years from the filing date because at least a portion of the debt is repaid. Chapter 7 bankruptcy remains 10 years from the filing date because none of the debt is repaid.”
- “Civil judgments remain seven years from the filing debt. A civil judgment is essentially a debt you owe through the court.”
- “Unpaid tax liens remain 10 years from the filing date. Once paid, the lien will remain seven years from the paid date.”
- “Inquiries: remain two years from the inquiry date. However, the impact of inquiries on credit scores is minimal and decreases rapidly.”
3. Get organized
Perhaps the best way to start improving your credit is to get all of your finances in order. This means filing bills by due date as they arrive and setting payment reminders for yourself. Some people actually throw away bills for old debts, and this is catastrophic for one’s finances.
It’s wise to make a budget and include all of your bills, not just the ones you must pay to stay afloat, like your house payment, utilities, car, phone, Internet, and cable. Any debts you are liable for –like maxed-out credit cards, old medical bills, or student loans – are bills you have to include in your budget, as well.
Also, pull all three of your credit reports and evaluate your spending behavior. What is your largest debt? Are there any smaller items on your credit report you can pay off quickly? If you get into a mindset where your credit is a priority, your score will begin to improve. The change in thought process will help you prioritize, and you may choose to pay debt over buying something you don’t need.