This is an excerpt from “Your Playbook For Tough Times, Vol. 2: Needs And Wants Edition,” by Donna Freedman. Like its predecessor, the book offers tons of ways to live your best life on the money you currently have, while working always for a better financial future. The author – my mom! – is donating a copy to be given away; see below for details.
How to improve a low credit score
A low credit score can happen even to the most careful consumers, especially those who are unemployed or sick. I went into debt during a protracted divorce because attorneys bill by the minute.
Or maybe you made mistakes with your money. That happens, too. Now it’s time to adult-up and do something about it.
Improving your score can’t be done overnight. Seeing any uptick at all could take a couple of months. But the longest journey begins with a single step, so start walking.
Begin by taking a look at your credit score, which you can do several ways:
Credit Karma. You can check your TransUnion and Equifax numbers for free by signing up with Credit Karma. This will be a self-initiated “soft” credit inquiry, which won’t affect your score.
Credit Journey. This is a free service from Chase that lets you monitor your VantageScore, a FICO rival that’s based on TransUnion data. You don’t have to be a Chase customer to use Credit Journey, and it’s easy to sign up.
Your credit card statement. Quite a few card issuers now include your VantageScore or FICO number. Obviously this option doesn’t apply if you’re just starting out, or trying to fix past mistakes. But if you’re applying for credit now or in the future and several cards look equally good, choose one that offers the free score. That way you can monitor your progress.
eCredable. Suppose your credit got trashed during a long spell of unemployment, or that in the past you maxed out cards and then walked away. That’s both undeniable and unfortunate. eCredable provides an “alternative” score based on your payment of utilities, rent, landline and cellphone, and works with credit card companies and lenders willing to take a chance on the new you. While the interest rates will likely be higher, you’ve got to start somewhere. It’s free to join but you’ll pay a fee to generate reports once you’re ready to apply for one of those loans or cards.
Get a look at your credit report
Once you’ve checked your credit score you might learn that it’s not quite as bad as you feared. Or maybe it’s worse than you ever imagined. Either way, time to start fixing what’s broken.
Each year you can get a free report from each of the three major reporting bureaus (Equifax, Experian, TransUnion). Pull a different one every four months – and always through AnnualCreditReport.com. Be sure to enter the URL precisely, because similar-sounding websites charge for the privilege.
The credit bureaus will likely try to sell you some products while you’re there – they’re businesses, after all – but you are not required to provide a credit card number to order your free credit reports. (And if you’re told you must do so? You’ve reached the wrong site, so skedaddle.)
Once your first report is in hand, you will be able to:
Dispute any errors. Mistakes happen. For example, one of my credit reports claimed that I was employed by a credit union in the southeastern United States. Um, nope. That was a benign error, but some reports contain incorrect info about loans or cards that aren’t yours. (Hint: Identity theft happens, too.) File a dispute online through the agency that generated the report.
Check your credit limits. Sometimes a report lists limits as lower than they actually are. That could make it look as though you’re getting close to maxing out your card, which isn’t good (more on this later). Thus if your credit limit got raised and the issuer didn’t report it, ask that this change be made.
Try to negotiate. There’s no way to deny that you missed six months’ worth of credit card payments when you got really sick last year. What you can do is to ask creditors if they will “erase” debts/accounts that went to collection. Offer to pay the remaining balance if the creditor will report that the account was “paid as agreed” or, better yet, remove it altogether.
(It’s essential that you get the creditor to agree to this in writing before you make your payment. Then the next time you order a credit report – remember, you’ll be doing this three times a year – make sure the account status has been amended/removed.)
You could also ask your creditor for a “good-will adjustment.” After all, you always paid on time until that car accident left you unable to work for half a year. Write a letter to the card company explaining the situation and emphasizing the reason you fell behind on payments, and ask that the mistakes be removed from the credit report. No guarantees, but maybe you’ll find a supervisor who sees things your way.
More improvement tactics
Raising your credit score isn’t just about correcting mistakes. Try one or more of the following strategies to boost that three-digit number.
Become an authorized user. You can be added to a card owned by a friend or relative. However, if you’ve made a mess of your finances in the past you’ll probably be told “no” a lot. Perhaps someone will give you a chance; if so, do not mess up again. In fact, you should write up an agreement about your spending limit and the mechanism for paying what you owe to the cardholder. Don’t stiff this person, ever. He or she is trying to help you fix your life.
Under-use your credit. Got a card already? Don’t go hog-wild. To maximize the “credit utilization ratio” part of your FICO score, you’d ideally spend no more than 10 percent of your credit limit in any given month. Definitely don’t spend more than 30 percent of that limit. Even if you pay in full every month it still looks bad to the credit folks, who are looking at a snapshot of your spending rather than the whole photo album.
Raise your credit limit. Ask your creditor to increase your spending ceiling, e.g., bumping that $1,500 card up to $3,000. But do this only if you can trust yourself not to indulge in lifestyle inflation. Otherwise you’ll wind up using way too much of the limit; as noted above, this is Not A Good Thing.
Don’t cancel a card. Closing the account makes your available credit drop, which isn’t something you want to have happen. A good way to keep a little-used card open is to use it for a recurring charge; for example, I use an orphan card for my phone/Internet payment.
Still more score-boosters
Vary your credit. Buy a piece of furniture or an appliance on installment, if you’re absolutely certain that you can make the payments on time. (The best plan is to have enough cash right now to pay for it.) Or take a small personal loan from your credit union and pay it off diligently. Either tactic should result in a modest bump in your score.
Get a credit card. If you’re just starting out, or if you’ve always paid cash but now recognize the need for a credit score, apply for the best card you can find. Having one or two cards will improve your score as long as you pay your bills on time and don’t charge too much. Shop for the best deals at sites like BeverlyHarzog.com, CardRatings.com and NerdWallet.com.
Can’t get traditional plastic? Search the above-mentioned sites for a secured card, i.e., one that you guarantee with a cash deposit. Because these cards carry fees, shop around at the sites noted above or at banks and credit unions for the best deals. It’s also essential that you choose a brand that reports to all three credit bureaus.
Always pay on time. Paying your credit card bill a little late (or, heaven forbid, missing a payment) will put a hurt on your score. Payment history represents 35 percent of your FICO. Automated payment is your friend if you’re scattered/super-busy.
Or pay twice a month. Make one payment right before the statement closing date, and another one right before the due date. The former will reduce the balance that the credit bureaus see* and the latter will make sure you never pay interest or late fees. Besides, if you’re carrying a balance there’s a nice psychological boost to watching those numbers drop. (Incidentally, one woman I know makes weekly payments to her cards.)
*This matters because of the snapshot the credit bureaus take. If you spend a lot one month, the resulting high balance would look like you’re maxing out the card. Remember, you don’t want to use too much of your credit at any given time.
Playing the credit game
Here’s one thing that won’t improve your credit score. Carrying a balance. Wish I could drive a virtual stake through the heart of this enduring financial myth.
It really doesn’t matter whether or not you like the current credit scoring system. The fact is that this three-digit number can either enhance or derail your finances.
You don’t have to like playing the credit game. Adults do plenty of things they don’t necessarily like: paying taxes, planning for retirement, walking with colicky infants at 2 a.m., choosing fruit cup instead of French fries at the diner.
We do these things because they are the smart and/or right things to do. Until the credit scoring system changes, you’d be smart to work within it.
Want to win an e-copy of “Playbook Vol. 2”? All you have to do is leave a comment below. Do this by 11:59 p.m. PDT on Thursday, July 20.
I’ll announce the winner this weekend — and provide a short-term discount code for everyone else.