Now is a great time to refinance, there is no question about that. Of course, with refinancing comes the fun of dealing with getting approved and getting approved for certain rates comes with the fun of dealing with credit scores. One of the top questions I get regularly is “what should I do to fix my credit score? (or the variation what should I do to improve my credit score)“ which is usually accompanied by one of the following opinions:
1) Credit cards are Satan; evil creatures stalking their prey deep into the night..
2) The credit card companies are evil, taking advantage of the public
The truth is that credit card companies are machines. They are giant revenue generating machines. Unfortunately, that revenue comes at the expense of us, the consumer. That being said, the responsibility lies with us. There are harsh penalties when we get sucked in. As soon as you sign up for a credit card you are accepting responsibility for your actions with that card. That includes paying on time, paying at least your minimum payment, and not skipping payments. Right about now, since you are here wanting to fix you credit score you are screaming at me “Jesse tell me how to fix my credit score”
Lets talk first about fixing mistakes on your credit report
This is why I actually am writing today. We are thinking of refinancing since we bought our house during the rate spike a few years ago. I decided to pull my credit report just to make sure since I had my wallet stolen a few months ago. As I was browsing through the report I noticed that all three credit agencies were reporting me 30 days late on a credit card payment for a credit card that I had never used (I got when I bought a TV from circuit city a while back, then I returned the TV and never had a balance on the card). Here are the steps to take to correct an erroneous entry:
1) Contact the credit card/bank/whoever that incorrectly reported.
Ask them for details when/why/what etc and ask them to provide documentation. Sometimes they will have documentation, sometimes they will not, and commonly if it is an old account they may not even have anything on file. If this is the case, it may be as simple as filing a dispute with their own credit department (which most credit card companies have). If they are not forthcoming or helpful, you may have to move on to the next steps.
2) Either report online or send a certified letter to the credit agencies to dispute the inaccuracy.
Here is what a template might look like:
(City, state, and zip code)
Dispute Investigation Department
(City, state, and zip code)
Dispute Investigation Department,
I am writing to inform you that there is inaccurate information on my credit report. The following data is not correct and should be updated:
(List each inaccuracy on your credit report. Include exactly why it is in inaccurate and what it should be replaced with)
I have attached a marked copy of my credit report to assist your investigation. In addition, I have included (list the copies of account records, statements, and communication records).
Thank you for your assistance with this matter,
(Your full name)
(Social Security number)
3) Submit your credit dispute
Submitting your dispute by mail is best, but only Equifax and TransUnion allow this kind of dispute. Experian requires all disputes to be submitted online. For phone or online disputes, you may need to provide the identification number located at the bottom of your recent credit report. Using the information you put together in Step 2, submit your dispute to each of the credit bureaus:
4) Track what is going on with your credit report and credit score
The credit bureaus have 30 days to investigate your dispute and make changes to your credit report and thus help fix your credit score. Once this investigation is complete, they will send you a letter that includes information about what was and was not updated on your credit reports. If you were unable to get an error corrected, try submitting your dispute again with new documentation. You can also try working directly with the company that reported the error to have the matter corrected. Once you receive notification that an error has been updated or removed from your credit report it is a good idea to do a final credit check to confirm that the changes have actually been made to your satisfaction.
Next lets talk about fixing and improving your credit score
This is where the real legwork is because this is where you take matters into your own hands to fix your credit.
1) Pay down your credit cards.
Paying off your installment loans can help your credit scores, but it won’t hold a candle to the effect of paying down or paying off those little evil revolving accounts such as credit cards. One of the factors that go into your credit score is the gap between the amount of credit you’re using and your available credit limits. Getting your balances below 40% of the credit limit on each card can really help. Now I know that goes against what I normally say about highest APR first but in this case you have a different goal; maximize credit. The main place this could be helpful is if you are raising your credit score to get, say, a 0% balance transfer card.
2) Slow or stop using your credit cards
It is going to be impossible to do #2 if you don’t do this. Another problem is that if you are doing large passthroughs, your balance may be reported at its highest point so while you are trying to boost score its best to avoid the cards all together.
3) Use an old card
Conversely, make sure that you keep old accounts active. If it is inactive for too long a lender might request the account be closed which would hurt your credit history (longer is better!). I suggest making a few small purchases and paying them off.
4) Check your credit limits
Make sure that your credit limits are being reported correctly on your credit report. This goes back to the ratio thing; if it is showing a lower credit limit than you actually have, get it corrected so that your ratio goes down.
5) Pay everything on time
1) DO NOT Pay loans late
As if the above do wasn’t enough, it also gets a top spot on my don’t list. Whatever you do, do not make late payments, especially on things like your mortgage. These will absolutely devastate your credit score. I dont want to get any email from any of my readers saying “Hey I did what you said above, and I only missed one mortgage payment, but my score is shot and you lied about fixing my credit score! Im never reading again. WAaaaa” or anything else along those lines.
2) DO NOT Apply for new credit cards
New credit hurts your score temporarily. How long it hurts for is hard to say and not worth risking. I had a case where I applied for a 0%, got it, transferred balances, and my credit score dropped 30 points for quite a while. Its just not a good idea.
3) DO NOT Close old accounts
This goes back to the do’s; older credit is better.
4) DO NOT Wait for there to be a problem before contact a debtor you can’t pay
If you are in dire straights, chances are you can call the company and tell them there is no way you can pay and that you would like to make a plan. Chances are good they will work with you because they don’t want you to go to collections any more than you do. They have much less a chance of collecting from you if it goes to collections and they know it.
5) DO NOT Fall for credit counseling or consolidation scams
If in doubt, send me an email. Seriously, I will write you back. I care about the readers and I do not want you to put yourself in a worse situation than you are already in.
Remember, you can save yourself thousands of dollars in just a few years by taking steps to fix your credit. So get out there and fix your credit score! After all, if you are paying 29% APR, you as well just be…
(In the Carnival of personal finance)