So you've had a few problems getting the bills paid lately, and you're wondering what you can do to repair the damage to your credit.FICO credit scores under 620) to make obtaining loans and credit cards with reasonable terms difficult.
To improve your credit scores, it's important to know where you stand now. You can get free credit reports once a year (see "How to get a credit report for free"), but you typically have to pay to see your FICO scores. (You can get other credit scores for free at sites like Credit Karma, but these aren't typically the scores lenders use.)
If your scores are above 760, you're probably already getting the best rates. If they're anywhere below that mark, though, they could stand some improvement.
So here are the nine steps you can take to speedy credit repair:
1. Get a credit card if you don't have oneDon't fall for the myth that you have to carry a balance to have good scores. You don't, and you shouldn't. But having and using a credit card or two can really build your scores.
If you can't qualify for a regular credit card, consider a secured credit card, where the issuing bank gives you a credit line equal to the deposit you make. Look for a card that reports to all three credit bureaus. Three to consider are Public Savings Bank Classic Secured Visa, Orchard Bank Classic MasterCard and Citi Secured MasterCard, according to the credit experts I interviewed for "10 credit cards that won't rip you off."
2. Add an installment loan to the mixYou'll get the fastest improvement in your scores if you show you're responsible with both major kinds of credit: revolving (credit cards) and installment (personal loans, auto, mortgages and student loans).
If you don't already have an installment loan on your credit reports, consider adding a small personal loan that you can pay back over time. Again, you'll want the loan to be reported to all three bureaus, and you'll probably get the best deal from a community bank or credit union.
3. Pay down your credit cardsPaying off your installment loans (mortgage, auto, student, etc.) can help your scores but typically not as dramatically as paying down -- or paying off -- revolving accounts such as credit cards.
Lenders like to see a big gap between the amount of credit you're using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help; getting balances below 10% is even better.
Though most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
4. Use your cards lightlyRacking up big balances can hurt your scores, regardless of whether you pay your bills in full each month. What's typically reported to the credit bureaus, and thus calculated into your scores, are the balances reported on your last statements.
You often can increase your scores by limiting your charges to 30% or less of a card's limit; 10% is even better. If you're having trouble keeping track, you can set up e-mail or text alerts with your credit card companies to let you know when you're approaching a limit you've set. If you regularly use more than half your limit on a card, consider using other cards to ease the load or try making a payment before the statement closing date to reduce the balance that's reported to the bureaus. Just make sure to make a second payment between the closing date and the due date, so you don't get reported as late.
5. Check your limitsYour scores might be artificially depressed if your lender is showing a lower limit than you've actually got. Most credit card issuers will quickly update this information if you ask.
If your issuer makes it a policy not to report consumers' limits, however -- as is sometimes the case with "no preset spending limit" cards -- the bureaus may use your highest balance as a proxy for your credit limit.
If you have an American Express charge card -- the kind that must be paid in full every month, rather than the kind on which you carry a balance -- you probably don't have to worry, because charge cards typically aren't included in the credit utilization portion of the FICO formula.
If, however, the card is categorized on your credit reports not as a charge card but as a revolving credit card, and either a credit limit or high balance is reported to the bureaus, your balances on the card could be a problem.
You could go on a wild spending spree to raise the high balance reported to the credit bureaus, but a more sober solution would simply be to pay your balance down or off before your statement period closes.